Citi to Buy Back $7.3 Billion of Bonds

Settlement Aims to Help Customers Unload Auction-Rate Securities

NEW YORK, Aug. 7 -- Citigroup agreed Thursday to buy back $7.3 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 by New York State Attorney General Andrew M. Cuomo, will be extended over the next three months to 40,000 individual, nonprofit and small- and medium-size 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 during 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 neither admitted nor denied wrongdoing but agreed to pay $100 million in civil penalties.

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

"We are proceeding" with the investigations, Cuomo said. "Citibank was one of the largest firms in this business but certainly not the only firm."

Citigroup had been the primary dealer on $72 billion of auction-rate securities before the market collapsed. As of June 30, the bank's auction-rate program had shrunk to $48 billion, according to regulatory documents filed last week.

As part of its settlement, Citigroup will 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 refund refinancing costs incurred after the meltdown by municipalities that issued auction-rate bonds through the bank in the past year.

The bank has three months to complete the securities repurchases from retail and small-business customers who cannot sell the bonds at auction. In the meantime, Citigroup will allow those customers to borrow amounts equal to their auction-rate securities holdings should they need the cash.

"Since the beginning of the auction-rate securities crisis, Citi has worked diligently with issuers, investors, and regulatory authorities to obtain liquidity for holders of illiquid auction-rate securities," Citigroup said in a statement about the settlement. "We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients."

Citigroup estimated that the $7.3 billion of bonds eligible for repurchase are currently worth about $500 million less than their collective face amounts, implying a market value of about 93 cents on the dollar. The impact of bringing those bonds onto Citigroup's balance sheet "is expected to be de minimis," the company said.