Citigroup to pay out billions in bond scandal

Aug 7, 2008, 19:01 GMT

New York - Citigroup reached a multibillion-dollar settlement with regulators and governments on Thursday on claims it improperly urged customers to buy a type of bond that fell apart in conjunction with the subprime mortgage crisis.

Citigroup will buy back from customers 7.5 billion dollars worth of auction-rate securities - a type of bond without a set interest rate for which rates are instead set at periodic auctions.

The Securities and Exchange Commission, New York's Attorney General Andrew Cuomo and others alleged Citigroup pushed the securities to customers as providing easy access to their invested cash, without much risk.

The system functioned as long as there were customers willing to buy the bonds. But the market for the bonds evaporated in February and the auctions failed after bond insurers that guaranteed the investments got caught up in the subprime mortgage crisis. Investors were left unable to sell the securities.

The settlement could set a precedent for other investment firms that sold such auction-rate securities, worth an estimated 200 billion dollars.

'Today's settlement sends a resounding message to the entire auction-rate securities industry: This type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors,' Cuomo said in a statement. 'Our goal is simple: to get investors back their money, and thats exactly what this deal does.'

In addition to buying back 7.5 billion dollars in investments from about 40,000 individual investors, the firm will pay a 50-million- dollar fine to New York state and a 50-million-dollar fine to the North American Securities Administrators Association.

It must also develop a plan to liquidate 12 billion dollars more of the same securities sold to institutional investors, like retirement plans.

Citigroup said in a statement that it has worked with investors to get cash for those who hold auction-rate securities they cannot sell.

'We are pleased to reach this agreement in principle with the New York attorney general, the Securities and Exchange Commission, and other state regulatory agencies,' the company said. 'We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients.'