Citigroup said it has received subpoenas and/or requests for information from various self regulatory agencies, as well as government agencies, in connection with the sale of auction rate securities. The company also said in a regulatory filing that the Securities and Exchange Commission has launched a formal investigation in to the matter. The SEC was one of the federal agencies to request information from Citi.
In addition, the banking giant said it is responding to subpoenas from various state agencies, including those in New York, Texas and Massachusetts.
Citi also said it is the target of several class action lawsuits related to its marketing, sales, and underwriting of ARS. The lawsuits allege, among other things, violations of the federal securities laws, federal investment adviser laws and state common law, it added. Several of the class action lawsuits have been consolidated in the Southern District of New York.
In March, CFO.com reported that two lawsuits were filed in U.S. District Court in New York charging that the company deceptively marketed the securities as liquid equivalents to money-market funds, and did not reveal material information about them. One of the suits reportedly claimed that, rather than “disclosing the true nature of ARS and the substantial liquidity risks associated with them, defendants continued to push as many ARS[s] as possible unto its customers in order to unload inventory off its already troubled balance sheet.”
At the time, Alex Samuelson, a company press representative, told CFO.com: “We believe [the lawsuits] to be without merit and will defend [ourselves] against the actions.”
In May 2006, the SEC fined 15 major broker-dealers a total of $13 million for practices related to the ARS market. The firms, which neither admitted nor denied the findings, consented to the entry of an SEC cease-and-desist order. Those that agreed to pay the largest fine, $1.5 million, included Citigroup; Bear Stearns; Goldman Sachs; J.P. Morgan; Lehman Brothers; Merrill Lynch; Morgan Stanley; and RBC Dain Rauscher.
Auction rate securities are municipal bonds, corporate bonds, or preferred stocks with interest rates or dividend yields that are periodically reset through Dutch auctions. The SEC had alleged that some of the firms’ practices favored certain customers over others, and some favored the issuer of the securities over customers, or vice versa.
The commission alleged that between January 2003 and June 2004, each firm engaged in one or more practices that were not adequately disclosed to investors, which constituted violations of securities laws. Those practices included allowing customers to place open or market orders in auctions; intervening in auctions by bidding for a firm’s proprietary account or asking customers to make or change orders; and providing certain customers with information that gave them an advantage over other customers in determining what rate to bid.