WASHINGTON (CN) – Citigroup agreed in principle to a plan to buy back $7.5 billion of illiquid auction-rate securities from charities, individual investors and small businesses to settle charges that Citigroup fraudulently misled investors about the risky investments, the Securities and Exchange Commission announced.
The agreement also requires Citigroup to try to liquidate the $12 billion worth of auction-rate securities it sold to retirement plans and other institutional investors by the end of 2009.
Citigroup left investors with worthless money market and auction-rate securities in February 2008, when it stopped insuring liquidity by buying items that did not fetch regular market bids.
SEC Division of Enforcement Director Linda Chatman Thomsen estimated that the initial $7.5 billion settlement would help about 38,000 investors.
Citigroup may still face SEC fines after completing the payback agreement. That decision will be based in part on the SEC’s evaluation of Citigroup’s level of cooperation and completion of the settlement, as well as an assessment of how much the settlement ends up costing Citigroup.
The SEC and Citigroup must still finalize the agreement. For now, the terms require Citigroup to refund customers in each auction-rate security before liquidating its own holdings in the same security, give customers with illiquid securities no-cost loans until it buys the securities back, participate in non-industry arbitration where Citigroup may not challenge liability for misrepresenting security liquidity, notify all customers of the settlement, and set up a help line to answer customer questions about the settlement.