ST. LOUIS (CN) – Citigroup Global Markets’ advice to invest heavily in auction rate securities caused K-V Pharmaceuticals to lose millions of dollars, forcing it to cut 700 jobs, K-V claims in Federal Court. K-V claims Citigroup misrepresented the ARS as safe and liquid investments that met K-V’s investment guidelines; that ARS were liquid between auctions; that Citigroup never had a failed auction; and that in the event of a failed auction Citigroup would rectify the failure.
Citigroup recommended that K-V invest tens of millions of dollars in ARS between May 2005 and February 2008, the suit states. But it failed to disclose that ARS were not suitable alternatives to market funds; that ARS liquidity was uncertain because it depended on Citigroup’s artificially supporting the market; that no real ARS market existed; and that Citigroup had no intention of rectifying failed auctions, the suit states.
K-V said that on or about Feb. 11, 2008, Citigroup stopped supporting the auctions for ARS it sold to K-V, rendering them illiquid. On April 18, 2008, Citigroup announced writedowns of $1.5 billion of ARS inventory due to failed auctions.
K-V claims that because of Citigroup’s actions, it now holds $72 million of ARS, which if liquid at all can only be sold at a discount. K-V says the losses have led to a cash crisis, which forced K-V to seek loans, cut costs, and eliminate 700 jobs.
K-V seeks rescission of its ARS purchases and compensatory and punitive damages. It is represented by Robert Berry.
(This case was made available in two files. Part 1 is available from the icon on the CNS home page. Here is part 2.)