Transcripts

Citigroup's Auction-Rate Security Buy Back

SUZANNE PRATT: A major victory tonight for investors -- two big investment banks have agreed to buy back huge holdings of auction-rate securities, investments that were touted as safe but weren't. Late today, Merrill Lynch voluntarily announced it would repurchase $12 billion of those holdings, starting early next year. This morning, Citigroup agreed to buy back its auction-rate securities as part of a legal settlement with regulators. The nation's largest bank, Citi, will repurchase $7.5 billion in ARS' from small business customers, individuals and charities. It will also help institutional customers unload $12 billion of the securities and it will pay a $100 million fine. As Scott Gurvey reports, Citi was the first Wall Street firm to settle claims over how the securities were sold.

SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Once again, it is the state of New York which has extracted a price from Wall Street for alleged violations of the public trust. Attorney General Andrew Cuomo says Citigroup global markets misled investors to get them to purchase auction- rate securities, known as ARS.

ANDREW CUOMO, NEW YORK ATTORNEY GENERAL: Remember the theory behind the auction-rate securities -- it was the equivalent of cash, it was liquid. So if you were a conservative investor, you tended to buy these securities, because you didn't want to lock up your money for a long period of time.

GURVEY: The securities were created to give short-term investors the benefit of higher returns, which usually go to those willing to tie-up their funds for longer periods of time. But the meltdown of the mortgage market changed the environment. In the resulting credit crunch, the securities could no longer be sold because no one wanted to participate in the weekly or monthly auctions which set their price. The Securities and Exchange Commission participated in today's agreement, which is expected to set a pattern for agreements with other Wall Street firms. SEC enforcement chief Linda Thomsen says civil penalties against those firms are still an option.

LINDA CHATMAN THOMSEN, DIRECTOR, DIVISION OF ENFORCEMENT, SEC: It is our hope that the prospect of a penalty will make compliance with these terms and getting investors whole a real priority.

GURVEY: In 2002, then-New York Attorney General Eliot Spitzer accused investment banks of misleading investors through biased analyst recommendations designed to aid underwriting clients. The settlement in that case cost Wall Street $1.5 billion; cleaning up the ARS mess could cost more. Attorney Jacob Zamansky represents both individual and institutional holders of auction-rate securities.

JACOB ZAMANSKY, SECURITIES ATTORNEY, ZAMANSKY & ASSOCIATES: Citigroup got off easy. They paid $100 million fine. They bought back the auction- rate securities, but they did not admit to wrongdoing. That's significant. Also, no heads have rolled. The people that were responsible, no one's been punished.

GURVEY: Citi says the $100 million fine it will pay will not have a material impact on its bottom line. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.