SEC Finalizes $30 Billion Worth Auction-Rate Securities Settlement With Citigroup, UBS

Washington, D.C. - The Securities and Exchange Commission has finalized settlements with Citigroup Global Markets, Inc. (Citi) and UBS Securities LLC and UBS Financial Services, Inc. (UBS), who misled investors regarding the liquidity risks associated with auction-rate securities (ARS) that they underwrote, marketed and sold.

The Securities and Exchange Commission (SEC) said two companies will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February.

The settlements, which are subject to court approval, will restore approximately $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS.

“Today’s settlements are the largest in SEC history, and represent the largest return of customer money in the agency’s 75 years,” said SEC Chairman Christopher Cox.

“The Commission’s prompt action after the auction rate securities market froze in February of this year, which led to last summer’s settlements in principle, helped restore liquidity to tens of thousands of investors."

Cox added that every one of the investors -- including charities and small to mid-sized businesses-- covered by these settlements will be able to receive 100 cents on the U.S. dollar on their auction rate securities investments.

Auction-rate securities (ARS) are preferred shares or bonds with interest rates that reset on a regular period, some times it is reset every week, in auctions managed by the brokerage firms similar to Citigroup that originally sold them.

The SEC said that the companies misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets.

But in late 2007 and early 2008, the companies knew that the ARS market was deteriorating, leading the firms to have to purchase additional inventory to prevent failed auctions, and that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets.

According to the complaints, Citi and UBS failed to make their customers aware of these risks. In mid-February 2008, the firms decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid ARS.

"The SEC will continue to aggressively investigate whether other broker-dealers and individuals have failed to disclose to investors material risks about ARS that they marketed and sold," Linda Chatman Thomsen, director of the SEC's Division of Enforcement, said in the statement.

Thomsen said the SEC has yet to finalize settlement with four other companies including Bank of America Corp., Royal Bank of Canada, Merrill Lynch & Co. and Wachovia Corp., who are expected to buyback a total of $25 billion of auction-rate securities.

Click Here For The SEC Statement.