Citigroup may buy back auction-rate debt

NEW YORK: Citigroup Inc is in talks with regulators to buy back more than $5 bn of illiquid auction-rate securities and pay a fine of up to $100 mn to settle allegations that it wrongly told customers the debt was safe, The Wall Street Journal said on Wednesday.

Citing people familiar with the matter, the newspaper said the largest US bank by assets has been in talks with the office of New York Attorney General Andrew Cuomo, other state securities regulators and the US Securities and Exchange Commission (SEC).

On August 1, Cuomo's office threatened to charge Citigroup with fraudulently marketing and selling auction-rate securities and destroying documents that had been subpoenaed. The office accused Citigroup of wrongly telling customers that auction-rate debt was safe, liquid and the equivalent of cash. Cuomo left the door open to a settlement. A large payout would hurt Citigroup Chief Executive Vikram Pandit's efforts to slash costs and restore profitability.

Citigroup has lost $17.4 bn in the last three quarters, largely from debt write-downs and increased credit reserves. Citigroup spokeswoman Shannon Bell and SEC spokesman John Nester declined to comment. Cuomo's office was not available for immediate comment.

Last week, Citigroup said it has also been responding to subpoenas from Massachusetts and Texas over auction-rate securities.

Auction-rate securities have rates that set periodically. The $330 bn market was once considered safe, but a large part of it remains frozen after a February meltdown in which Wall Street stopped supporting the market.

Citigroup was the largest underwriter of auction-rate debt in all but one year this decade, as per the data. A settlement could establish a precedent for settlements with rivals that face civil charges over auction-rate debt.

It would also come years after Pandit's predecessor, Charles Prince, tried to clean up costly regulatory and legal problems tied to analyst research, and the bank's roles in bankruptcies of Enron Corp and WorldCom Inc. Prince left Citigroup under pressure last November.

A national newspaper, citing people familiar with the matter, reported that UBS AG is working on an auction-rate securities settlement, even as Citigroup finalized its own agreement.

Regulators have accused the Swiss bank and Merrill Lynch & Co of fraud over the securities. A UBS representative was not available immediately for comment on the report, neither were the SEC or Cuomo's office.