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Citi, UBS AG Agree to Buy Back Billions in Auction-Rate Bonds

Citi and UBS AG, two of the world's largest banks, have agreed to buy back billions of dollars worth of auction-rate securities sold to their customers -- and to pay hundreds of million dollars in penalties -- in two separate deals reached to settle charges that the financial giants made fraudulent misrepresentations in their marketing of auction-rate securities.

According to Reuters, "auction-rate debt has interest rates that reset through periodic auctions, typically held every seven, 28 or 35 days." The Securities and Exchange Commission (SEC) reports that Citi will "give individual investors, small businesses, and charities all $7.5 billion of their money back from auction rate securities (ARS) they purchased from the firm." The charges against Citi stem from the company?s marketing of auction-rate securities as highly liquid investments, when in fact that liquidity was premised on Citi?s provision of support bids in auctions for which there was insufficient customer demand. And in February 2008, when Citi stopped supporting auctions, widespread auction failures resulted, and thousands of the bank's customers were "left holding illiquid securities," according to the SEC.

New York Attorney General Andrew Cuomo called Thursday's agreement with Citi "a turning point for investors nationwide seeking relief from the collapse of the auction rate securities market."

On Friday, Switzerland's largest bank (UBS AG) reached an agreement over allegations of fraudulent sales of auction-rate securities, in which the company agreed to buy back $19.4 billion worth of the failed bonds and pay a $150 million fine, according to Bloomberg.com.

• SEC Press Release on Citi Agreement
• Citigroup Statement on ARS Settlement
• Reuters: Citigroup to Return $7 Billion to Auction-Rate Investors
• CNNMoney.com: Banks' Settlement: Rare Good Deal for Investors
• Bloomberg.com: UBS Agrees to Buy $19.4 Billion Auction-Rate Debt
• Press Release on Citi Settlement, from New York Attorney General Andrew Cuomo

Full post as published by FindLaw's Common Law on August 08, 2008 (boomark / email).