NY AG Auction Rate Securities Investigation Into Citigroup

STATE OF NEW YORK
OFFICE OF THE ATTORNEY GENERAL
120 BROADWAY
NEW YORK, NY 10271

NOTICE OF IMMINENT ACTION UNDER THE NEW YORK
EXECUTIVE LAW 5 63(12) AND NEW YORK GENERAL
BUSINESS LAW 66 352 et seq. (THE "MARTIN ACT")

BY E-MAIL and FEDERAL EXPRESS
Michael J. Sharp
General Counsel, Citi Global Wealth Management
Citigroup Global Markets, Inc.
399 Park Avenue
New York, NY 10043

Re: Auction Rate Securities Investigation

Dear Mr. Sharp:

I write to provide notice that the Office of the New York Attorney General intends to imminently charge Citigroup Global Markets, Inc. and Citi Smith Barney (collectively "Citigroup") for its fraudulent marketing and sales of auction rate securities, pursuant to New York General Business Law $5 352 et seq. (the "Martin Act") and Executive Law 5 63(12), as well as for its destruction of documents under subpoena, pursuant to New York General Business Law 5 352(4).

Citigroup's Fraudulent Practices In Connection with the Marketing and Sale of Auction Rate Securities

Over the past five months, the Attorney General's Office has conducted a nationwide investigation into certain practices relating to auction rate securities by Citigroup. The investigation has revealed that Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in connection with Citigroup's underwriting, distribution and sale of auction rate securities. Citigroup represented that auction rate securities
were safe, liquid, and cash equivalent securities. These representations were false, and had a severe detrimental impact on tens of thousands of Citigroup customers. Citigroup also failed to disclose to its retail clients and other customers that from August of 2007 up until widespread auction failures, which occurred in the early part of 2008, the auction rate securities market only continued as a result of Citigroup placing support bids. Since February 13,2008, Citigroup's customers who own auction rate securities have been unable to cash or sell the securities.

Consequences Resulting From Citigroup's Destruction of Documents

The Attorney General's investigation also uncovered that Citigroup failed to comply with its legal obligations under the Martin Act when it destroyed "recordings of telephone conversations concerning the marketing, sale, distribution or auction of Auction Rare Securities" called for by the Attorney General's Subpoena dated April 14,2008. This destruction occurred after Citigroup received this office's subpoena. Under section 352(4) of the Martin Act, a violation of the law occurs when ". . . a person subpoenaed to attend such inquiry fails to obey the command of a subpoena, without reasonable cause, or if a person in attendance upon such inquiry shall without reasonable cause, refuse to . . . produce a book or paper when ordered to do so by the officer conducting such inquiry, or if a person, partnership or corporation, company, trust or association fails to perform any act required hereunder to be performed . . ."

Citigroup initially failed to notify the New York Attorney General's Office about the destruction of the tapes even though Citigroup learned in mid-June that recordings of its Auction Rate Desk had been destroyed. It was not until June 30,2008, that the Attorney General's Office learned of this conduct, which significantly and materially interfered with the ability of the Office of the Attorney General to conduct its investigation.

Citigroup has informed the Attorney General's Office that it is likely unable to recover the lost information on the destroyed tapes. Verbatim records of the most important witness statements during the most relevant period were therefore destroyed after the issuance and service of the subpoena.

Citigroup Must Take Immediate Action

The Office of the Attorney General believes that a settlement with Citigroup must include terms to: buy back retail investors' securities at par in the immediate future; reimburse retail investors for damages they have incurred; undertake immediately to make institutional investors and corporations whole; and a significant penalty for Citigroup's misconduct during our investigation.

Thousands of customers nationwide have been damaged due to Citigroup's fraud.

The Attorney General's office will continue to work to achieve justice for these consumers.

David A. Markowitz
Chief, Investor Protection Bureau