Citigroup Negotiating Auction Rate Securities Buy BackAug 6, 2008 | Parker Waichman LLP
The Wall Street Journal is reporting that Citigroup is in negotiations with the New York State Attorney General's Office and others to buy back illiquid auction rate securities. Last week, New York Attorney General Andrew Cuomo had threatened Citigroup with a lawsuit over its handling of auction rate securities.
The New York Attorney General has been investigating Citigroup's auction rate securities business for the past five months. In a letter written August 1, Cuomo's office accused Citigroup of deceptively selling auction rate securities as cash equivalent, liquid investments. Among the allegations in the letter is one accusing the bank of failing to tell investors that, from last August until earlier this year, the market was kept afloat only because the bank placed bids in auctions for the securities. Finally, it accuses Citigroup of violating state law by destroying “recordings of telephone conversations concerning the marketing, sale, distribution or auction” of the securities. According to The Wall Street Journal, the recordings requested by Cuomo’s office in an April subpoena.
Cuomo has threatened to file suit against Citigroup within weeks if the bank does not buy back the auction rate securities it sold, and compensate some investors for damages they have incurred. The letter also said that the Attorney General’s office wants the firm to pay an unspecified penalty.
According to sources interviewed by The Wall Street Journal, Citigroup is negotiating with Cuomo's office, state security regulators and the Securities and Exchange Commission to resolve the matter. A deal may be in the works that would require Citigroup to buy back $5 billion of illiquid auction rate securities from investors and pay regulators a fine of $100 million.
Auction rate securities are long-term corporate bonds, municipal bonds and preferred stock on which the interest rates are reset periodically based on bids submitted through securities firms. Generally, rates are reset every seven, 14, 28 or 35 days. Because they can be sold during weekly or monthly auctions, banks and brokerages often touted auction rate securities as short-term investments or cash equivalents. Unfortunately, because of the credit crises, the market for auction rate securities crashed. Thousands of investors have been bewildered to find out that the investments they were sold as cash equivalents are now illiquid.