Citigroup to Return Billions to Investors, Pay $100M in Penalties

NEW YORK, Aug. 7 -- Citigroup agreed Thursday to buy back about $7.5 billion of bonds from retail and small-business customers who got stuck holding the debt when the market for so-called auction rate securities melted down in February.

The offer, part of a settlement announced Thursday by New York State Attorney General Andrew Cuomo, will be extended over the next three months to 40,000 individual, non-profit and small- and medium-sized business customers. The bank also agreed to work with larger customers, including retirement plans and other institutional investors, to help them unload $12 billion of auction-rate debt.

Demand for the bonds, sold as often as once a week at auctions that would determine their interest rates, evaporated earlier this year amid the broader credit crunch, leaving investors unable to cash in their holdings. Cuomo last week threatened to sue Citigroup, alleging that the company defrauded investors by marketing auction-rate bonds as safe, cash-like instruments.

"It turns out they were anything but," Cuomo said at a news conference announcing the settlement between Citigroup and regulators from several states, along with the Securities and Exchange Commission.

Under the settlement, Citigroup will pay $100 million in civil penalties, consent to a public arbitration process to resolve claims from customers who sold their auction-rate holdings at a discount following the market crisis, and reimburse New York municipalities that issued auction-rate bonds through Citigroup in the past year.

Cuomo's office last month sued the Swiss bank UBS over allegations it defrauded customers of auction rate securities. Cuomo said regulatory investigations into the role of other Wall Street dealers in the auction-rate securities market, including UBS, will continue.