New York Attorney General Andrew M. Cuomo has announced a multi-billion dollar agreement with Citigroup Global Markets, Inc. and Citi Smith Barney (collectively, “Citigroup”) to settle allegations that Citigroup was making misrepresentations in its marketing and sales of auction rate securities. As part of the deal, Citigroup is set to buy back some $7.3 billion in ARS, which Citigroup says should cost it $500 million pre-tax; it must also pay fines of $100 million.
“We are pleased to reach this agreement in principle with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies,” Citibank says in an August 7 statement.” We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients.”
“Today’s settlement sends a resounding message to the entire auction rate securities industry: This type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors in auction rate securities,” says Attorney General Cuomo in a release of August 7. “Our goal is simple: to get investors back their money, and that’s exactly what this deal does.”
“Our most important focus continues to be on helping our clients. Since the beginning of the Auction Rate Securities (“ARS”) crisis, Citi has worked diligently with issuers, investors, and regulatory authorities to obtain liquidity for holders of illiquid ARS. We have made tremendous progress on these efforts, and, in fact, more than 50 percent of our retail clients’ holdings in ARS have been redeemed or auctioned at par since the crisis began.
The key terms of the settlement and its expected impact, according to Citibank, are as follows:
By November 5, 2008, Citi will offer to purchase at par ARS that are not auctioning from all Citi individual investors, small institutions (as defined by the terms of the settlement), and charities that purchased ARS from Citi prior to February 11, 2008.
The par value of the ARS currently eligible for purchase from individual investors, small institutions, and charities totals approximately $7.3 billion. The capital impact of bringing these assets onto Citi’s balance sheet is expected to be de minimis.
Based on the ARS currently eligible for purchase and our current market value estimates, the difference between the purchase price and the market value is estimated to be in the range of $500 million on a pre-tax basis. The actual pre-tax loss to Citi as of the date of purchase will depend on the market value at that time and the amount of securities purchased.
Should individual investors, small institutions, and charities need interim liquidity, they can borrow from Citi the par amount of their ARS on a non-recourse basis. Such loans will become fully due and payable as soon as the proceeds of the par purchase are credited to their account or when the investor declines the purchase offer.
Citi will work with issuers and other interested parties to provide liquidity solutions for Citi institutional investor clients. In doing so, Citi will use its best efforts to facilitate issuer redemptions and/or to resolve its institutional investor clients’ liquidity concerns through resecuritizations and other means. The New York Attorney General will monitor Citi’s progress and, beginning on November 4, 2008, retains the right to take legal action against Citi with respect to its institutional investor clients. The other regulators have entered into a similar arrangement but with a December 31, 2009 date.
Citi will refund refinancing fees to municipal ARS issuers that issued ARS in the primary market between August 1, 2007 and February 11, 2008, and refinanced those securities after February 11, 2008.
Citi will pay a $50 million fine to the State of New York and a $50 million fine to the other state regulatory agencies.
Citi neither admits nor denies allegations of wrongdoing.