Citigroup Is Expected to Buy Back Securities
By ERIC DASH
Published: August 6, 2008
Citigroup was nearing an agreement late Wednesday to buy back more than $7 billion of auction-rate securities from investors to settle claims that it misled clients about the dangers of the investments.
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The pact, with state and federal regulators, is expected to include a fine of as much as $100 million, according to several people involved in the talks.
Also on Wednesday, in an unrelated case, STMicroelectronics, a semiconductor company, sued the Credit Suisse Group, saying that Credit Suisse had defrauded STMicroelectronics by investing its cash in unauthorized and unsuitable investments.
Regulators are investigating at least a dozen Wall Street firms for their role in the sales and marketing of so-called auction-rate investments, and analysts expect a wave of settlements in the next few months.
Auction-rate securities are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them. The $300 billion market for the investments collapsed in February, trapping investors who had been told that the securities were safe and easy to cash in.
Citigroup declined to comment on the negotiations but said in a statement that it was “working with market participants and regulators to find an industrywide solution to auction-rate securities issues.”
According to the people involved, who spoke on the condition of anonymity because they were not authorized to speak, Citigroup is expected to buy back at least $7 billion worth of securities from individual investors, but the company could pay even more if it chooses to make institutional investors whole as well.
These people said Citigroup, one of Wall Street’s biggest auction-rate securities dealers, is expected to pay a $100 million fine to settle with the New York attorney general’s office and a task force of 12 state regulators, led by the Texas State Securities Board. Each group would exact a $50 million penalty.
The federal Securities and Exchange Commission also participated in the settlement talks but elected not to exact a penalty, pending its own investigation.
The expected settlement follows two days of closed-door meetings between Citigroup and the state and federal regulators, and reflects Citigroup’s desire to put its auction-rate securities troubles behind it.
Any settlement would also have implications for other Wall Street firms, with the Citigroup deal serving as a benchmark for the industry. Two other banks, UBS and Merrill Lynch, are under investigation by several groups of regulators. But unlike Citigroup, UBS faces additional allegations that at least one of its executives engaged in insider trading.
In the STMicroelectronics lawsuit, the company says that it instructed Credit Suisse’s brokers to invest in top-rated securities backed by student loans. Instead, the brokers invested in riskier securities backed by subprime mortgages, or those made to individuals with weak credit records, STMicroelectronics says.
The company further alleges that “from the beginning Credit Suisse Securities engaged in a bold and sophisticated scheme to defraud ST,” suggesting Credit Suisse was aware that its brokers were moving clients’ accounts into risky auction-rate securities as part of a scheme to get those securities off its own books and earn higher fees for its services.
David Walker, a spokesman for Credit Suisse, said he had not seen the lawsuit and declined to comment.
The suit seeks to recover at least $415 million of STMicroelectronics’ funds. The lawsuit says the company is one of more than a dozen multinational corporations, representing up to $2 billion in assets, that are victims. Since the company confronted Credit Suisse about the case in the summer of 2007, the bank has refused to return its funds, which have been marked down $115 million in value, the lawsuit says.
Jenny Anderson contributed reporting.
