SEC unveils multibillion-dollar settlement with Citigroup

The Securities and Exchange Commission said Thursday it had reached a multibillion-dollar settlement with US banking giant Citigroup regarding its marketing of complex debt securities. The regulator said that under the settlement's terms, Citigroup has agreed to effectively buy back 7.4 billion dollars' worth of auction-rate securities it marketed to tens of thousands of customers.
The deal also requires Citigroup to "liquidate" by the end of 2009 some 12 billion dollars' worth of auction-rate securities it sold to other investors. "Today's agreement in principle provides real relief to investors," said Linda Chatman Thomsen, the head of the SEC's enforcement division.
"This settlement in principle is an outstanding example of federal and state regulatory co-operation for the benefit of investors and markets," Thomsen said at a news conference at SEC headquarters in Washington.
The settlement was announced by federal and state regulators as a widespread credit crunch continues to weigh on major Wall Street banks. Officials said the buyback will benefit around 38,000 investors, small businesses and charities who had purchased the securities through Citigroup.
Auction-rate securities, essentially debt instruments issued by financial firms, municipalities and student-loan companies, typically have a fairly lengthy maturity, but the interest rates on such securities can be volatile and change at weekly and monthly auctions overseen by banks.
The SEC said Citigroup had marketed the securities as "liquid" investments, meaning they were almost as safe and accessible as cash, but the regulators said the securities were illiquid, making it hard for investors to reclaim their holdings. Such instruments formed a vital and lucrative business for many banks in recent years, but the market for auction-rate securities collapsed in February as the credit squeeze - which began in the housing and mortgage markets - worsened.
The settlement comes on the heels of a separate investigation by New York state attorney general Andrew Cuomo into how Citigroup marketed auction-rate securities. "It will help to restore confidence in this marketplace," Cuomo said, referring to the Citigroup settlement. Cuomo's office is also probing how other big banks marketed auction-rate securities.