Risk & Compliance

SEC Completes ARS Pacts with Citi, UBS

The banks will provide nearly $30 billion to customers who invested in the securities before the market froze.
Stephen TaubDecember 11, 2008

The Securities and Exchange Commission completed its settlements with Citigroup Global Markets Inc., and UBS Securities LLC and UBS Financial Services Inc., which all told 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.

In early August the regulator had announced its preliminary settlements with the firms. Without admitting or denying the SEC’s allegations, Citi and UBS agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of measures. The SEC had accused the two firms of misrepresenting to customers that ARS were safe, highly liquid investments that were comparable to money markets.

According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew 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 regulator.

The complaints allege that Citi and UBS failed to make their customers aware of these risks. In 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 ARS, the complaints also assert.

“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.

Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, said the SEC is looking to finalize the four other settlements-in-principle that the Division has entered into with Bank of America, RBC Capital Markets, Merrill Lynch and Wachovia.

The settlements with Citi and UBS will restore about $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS, according to the SEC. Under the settlement, Citi will offer to purchase ARS at par from individuals, charities, and small businesses that purchased those ARS from Citi, even if those customers moved their accounts. Citi also will “use its best efforts” to provide liquidity solutions for institutional and other customers, including facilitating issuer redemptions, restructurings, “and other reasonable means.”

The bank also will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS. In addition, it will reimburse eligible customers for any excess interest costs associated with loans taken out from Citi due to ARS illiquidity.

UBS will offer to purchase at par from all current or former UBS customers who held their ARS at UBS as of Feb. 13, 2008, or purchased their ARS at UBS between Oct. 1, 2007, and Feb. 12, 2008, even if they moved their accounts. It will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS. UBS also will reimburse customers for any excess interest costs incurred by using UBS’s ARS loan programs.