Friday, August 1, 2008

More Auction Rate Securities Troubles for Banks

(Naked Capitalism) Yves had previously posted about Massachusetts suing Merrill Lynch over auction-rate securities. A new Financial Times post indicates that Citi is in hot water with New York over the same instruments:

Citigroup was on Friday accused of destroying records subpoeaned by Andrew Cuomo, the New York attorney-general, who intends to sue the investment bank for its role in the collapsed auction rate securities market.

Citi “repeatedly and persistently committed fraud” by misrepresenting auction rate securities as safe and cash-equivalent investments, said David Markowitz, chief of the office’s Investor Protection Bureau, in a letter sent to the bank on Friday.

After receiving a subpoena in mid-April for records under New York’s powerful Martin Act, Citi had “destroyed” recordings of related telephone conversations and failed to notify authorities – even though it learnt in mid-June that tapes had been destroyed, the letter claimed.

While the main focus of the article is a dispute over destroyed tapes of phone conversations, the article mentions what the Attorney General intends to pursue as settlement:
Mr Cuomo’s office said any settlement with Citi must include the bank buying back retail investors’ securities at par and paying a “significant penalty”.
A Bloomberg article also adds that New York, along with Texas and Massachusetts have already sued UBS AG, and that the SEC is planning further investigations.

According to Bloomberg, the auction rate securities market was worth $330 billion before its sudden collapse in February. If the stated goal of buying back securities at par with a penalty comes to pass, it looks like the banking industry may be dealing with another large writedown.

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