Legal News

Will Citi Settlement Herald End of ARS Party?

By Amir Efrati

We’re kind of sad that the auction-rate party seems to be winding down. So is Wall Street, which now has to pay for it.

On the heels of Thursday’s huge auction-rate securities buybacks by Citigroup and Merrill Lynch, the WSJ’s Kara Scannell brings us the scoop on the SEC’s soon-to-be historic settlement with Citi. (See prior WSJ coverage of the Citi deal here )

The settlement, in which Citi promised to buy back more than $7 billion of securities held by its customers, came after several days of around-the-clock negotiations between the company, the SEC and state regulators led by New York AG Andrew Cuomo (pictured). For the SEC, the settlement is unprecedented in size and scope. Scannell said negotiations with Citi and authorities were delayed in part over differences in settlement terms between the SEC and state regulators. The SEC, led by director of enforcement Linda Thomsen and assistant director Rick Firestone, wanted to balance the need to send a message to Citi and other banks, while also trying to take into consideration its difficult financial condition.

The SEC didn’t want to impose an upfront fine against Citi, say people familiar with the matter, while the states pushed for — and eventually got — a $100 million fine. Also, as part of the deal, the SEC wants Citi to use its “best efforts” to help help institutional investors sell roughly $12 billion of auction-rate securities it sold to retirement plans and institutional investors by the end of 2009, or else face possible sanctions from the commission. (In other words, this is the SEC’s version of a deferred-prosecution agreement.)

But Cuomo wants a status update in three months on the company’s progress with New York-based institutional investors. Tensions between state and federal authorities aren’t surprising. Earlier this decade, then-New York AG Eliot Spitzer often overshadowed the SEC by moving faster and more vocally in resolving cases against various Wall Street practices.

Meanwhile, Citi isn’t out of the regulatory woods just yet: The SEC still has an ongoing probe of individuals at the firm for their handling of the ARS market. Plus, once the settlement is approved by the SEC, people familiar with the matter say the agency will file a complaint a federal court, detailing allegations that Citi brokers misled investors by telling them that ARS were the same as money-market funds, which are easier to buy and sell.

Full post as published by Law Blog - WSJ.com on August 08, 2008 (boomark / email).