Fined

Citigroup may have to buy back securities

Citigroup Inc. may be forced to buy back about $8 billion in auction-rate securities and be fined as much as $100 million in a settlement with regulators over claims it improperly saddled customers with untradeable bonds, two people familiar with the case said.

Citigroup, the biggest underwriter of such debt, is in talks with the Securities and Exchange Commission, New York State Attorney General Andrew Cuomo, and a group of states, led by Texas, the people said. A preliminary agreement may be reached this week.

The settlement may set a precedent for negotiations with firms including UBS AG, which has already been named in civil complaints by Cuomo and Massachusetts officials. Other firms that sold the securities are also nearing the completion of talks to resolve regulatory probes, one of the people said.

The settlement would be another blow to Citigroup chief executive Vikram Pandit, 51, who recorded a $2.5 billion loss in the second quarter because of $12 billion of write-downs and increased bad-loan reserves. Regulators are trying to restore investor access to the funds, and the states are demanding additional fines, one of the people said.

A Citigroup spokeswoman and SEC spokesman declined to comment.

UBS, the biggest Swiss bank, was in talks with Massachusetts, Texas, New York, and the SEC, said a person familiar with those negotiations. A UBS spokeswoman said, "We have consistently worked with and are engaged in active dialogue with all our regulators."

Auction-rate securities are typically bonds whose interest rates are reset by periodic bidding. Firms including Citigroup abandoned their routine role as buyers of last resort for the instruments in mid-February, allowing the $330 billion market to collapse.

A settlement with the SEC would still require approval by the agency's commissioners. The regulator is considering how reversing auction-rate sales may affect banks' stability amid the global credit crisis, one of the people familiar with the case said.

"The SEC will take into consideration what is good for the country overall," said Tamar Frankel, a law professor at Boston University. "The purpose is to stop the bleeding and stop the unraveling of our financial system."

The market's seizure left Citigroup holding at least $6.5 billion of auction-rate securities, after booking $1.5 billion of write-downs during the first quarter, according to a regulatory filing. In the second quarter, the bank whittled the inventory to $5.6 billion.

(Published by Boston Globe - august 7, 2008)