Citigroup Settles over Auction-Rate Securities

State securities regulators, the Securities and Exchange Commission and Citigroup announced a settlement, in principle, related to auction-rate securities marketed and sold by Citigroup. Under the settlement, Citigroup has offered to repurchase, for face value, all auction-rate securities that it sold to individual investors, small businesses (defined as institutions having brokerage accounts of $10 million or less), and charities. In addition, Citigroup has agreed to make whole any individual investors, small businesses and charitable organizations that sustained losses on auction-rate securities that they purchased prior to February 11, 2008 and sold after February 11, 2008. It is estimated that this resolution will cost Citigroup approximately $7.5 billion. This settlement is to be effected by November 5, 2008.

Unfortunately, the settlement does not treat retirement plans and other large institutional investors as well. Citigroup was only required to use its “best efforts” to liquidate, by December 31, 2009, another $12 billion worth of auction-rate securities that the firm sold to retirement plans and larger institutional investors. The agreement stopped short of requiring Citigroup to repurchase the $12 billion worth of auction-rate securities sold to institutional investors and does not require that such investors be compensated for any damages sustained if they sold such securities. These investors still face the risk of sustaining serious losses on auction-rate securities. This risk could become quite significant if similar settlements are reached with other firms – there are serious doubts that the market could absorb a flood of auction-rate securities. Furthermore, the timing of the “best efforts” obligation could result in the statute of limitations barring certain claims possessed by such institutional investors if they postpone action until after December 31, 2009.

As part of the settlement, Citigroup also agreed to pay a $100 million fine and to reimburse issuers of municipal auction-rate securities for all refinancing fees they have incurred on auction-rate securities issued through Citigroup between August 1, 2007 and February 11, 2008.

While the announced settlement is unprecedented in its scope and terms, investors should be aware that the “devil is in the details.” The ultimate settlement document needs to be carefully reviewed to determine any limitations or restrictions put on Citigroup’s obligations. Moreover, it is important to note that the agreement does not resolve all claims by investors who purchased auction-rate securities. Investors are encouraged to carefully review any documents that they receive from Citigroup in connection with the proposed settlement and to carefully evaluate what their options are. Investors are specifically cautioned to be careful about the execution of any release which would generally release Citigroup from all claims which the investor may have against Citigroup.

Statements issued by the state task force investigating auction-rate securities make it clear that the task force intends to seek similar relief from other firms that sold auction-rate securities. Investors in auction-rate securities are encouraged to carefully monitor these developments.