Commissioner Gennet Purcell of the DC Department of Insurance, Securities and Banking (DISB) recently signed a final Consent Order requiring Citigroup Global Markets Inc. to repurchase auction-rate securities (ARS) from District of Columbia clients to settle allegations that the firm’s securities dealers misled investors about the safety of the ARS market.
Although marketed and sold to investors as safe, liquid and cash-like investments, ARS are actually longterm investments subject to complex auction processes that failed in early 2008, leading to illiquidity for investors. “From the day these auctions first failed, DISB has been seeking much needed relief and liquidity for investors stuck with ARS,” said Commissioner Purcell, who signed the Consent Order on April 22, 2010. “I am pleased that Citigroup has agreed to do what’s right by repurchasing clients’ positions, and I expect other firms that sold these securities in the District of Columbia to do the same.”
“DISB is holding Citigroup accountable for engaging in unethical behavior by selling auction rate securities to District of Columbia investors without full disclosure of the risks involved,” the Commissioner added. “This action sends a strong message that states will not tolerate unethical and unlawful behavior.”
According to the Consent Order, Citigroup has to pay a $346,612.59 fine to the District of Columbia, which represents the District’s pro-rata share of a $50 million settlement negotiated by a multistate task force of state regulators formed by the North American Securities Administrators Association. During the investigation, regulators discovered that Citigroup’s securities dealers failed to adequately inform customers and train employees on the risks associated with ARS.
The investigation into Citigroup’s role in the marketing of ARS is part of a larger state-led effort to address problems in connection with ARS investments. Early in 2008, state offices began receiving complaints from investors throughout the country. As a result, in April 2008, 12 states formed a task force to investigate whether the nation’s prominent Wall Street firms had systematically misled investors when placing them in ARS.
The Consent Order is the final step in the District’s ARS case against Citigroup, which was tentatively settled February 2009. DISB is actively negotiating settlements related to ARS sold in the District of Columbia by other Wall Street firms.
Customers who purchased auction rate securities in the District of Columbia, or have questions about the Citigroup settlement, may contact DISB at (202) 727-8000.