Corporate Governance

Citigroup the Latest to Make Good on ARS Marketing Fraud

By Jim Hodgson

As we have been reporting recently, following the February 2008 collapse of the auction rate securities (?ARS?) market, hundreds of thousands of investors were left holding hundreds of billions of dollars worth of illiquid ARS ?- essentially long-term bonds with periodic interest rate resets.  Earlier today, the SEC announced the terms of a preliminary ARS-related settlement with Citigroup, the largest U.S. bank by assets and a major marketer of ARS.  In total, Citigroup will buy back or help customers to dispose of nearly $20 billion worth of ARS marketed by the bank.

Specifically, Citigroup has agreed to buy back $7.5 billion worth of ARS that it sold to small businesses, individual customers, and charities; and it will ?use its best efforts to liquidate by the end of 2009 all of the approximately $12 billion worth of ARS the firm sold to retirement plans and other institutional investors.?  This, according to an SEC press release available here.  The bank must also start restoring liquidity to more than 2,600 institutions holding about $12 billion of the instruments.  Finally, Citigroup faces the prospect of paying a fine of $100 million to regulators, depending on the success of these undertakings, to settle allegations that it fraudulently misrepresented the liquidity profile of ARS to investors.

We applaud the SEC?s aggressive position on this issue and the result it obtained here against Citigroup.

Full post as published by PomTalk on August 07, 2008 (boomark / email).