Citigroup, UBS To Repurchase $30 Billion Worth Securities In Settement With SEC

Washington, D.C. (AHN) - The Securities and Exchange Commission said Thursday that it has finalized settlements with Citigroup Inc. (NYSE: C) and UBS Securities LLC, who allegedly mislead investors in its marketing and sales of securities before the market for those securities froze in February.

The U.S. regulator said that the companies are expected to provide nearly $30 billion to tens of thousands of customers who invested in auction-rate securities earlier this year.

The settlements, which still require court's approval, will be split between the two firms with $7 billion to be paid by Citi and $22.7 billion worth securities to be purchased by UBS.

"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 said 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 Securities and Exchange Commission said that Citi and UBS 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.

By mid-February 2008, Citi and UBS decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid securities.

"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.

The Securities and Exchange Commission has yet to settle 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.