Citi to Buy Back $7.3 Billion of Bonds

The bank still must help restore liquidity for more than 2,600 institutional customers holding about $12 billion of auction-rate debt. Under the terms of the settlement, Cuomo is giving Citigroup three months to show it has made sufficient headway in that effort. After that, he could pursue additional legal action.

Federal regulators will wait until the end of 2009 before imposing any potential penalties on Citigroup as it works out arrangements with its larger customers.

"We think this provides an incentive for Citigroup to continue to work on the institutional problem," Fredric Firestone, an associate director in the SEC's division of enforcement, said at the news conference here.

Cuomo repeatedly argued Thursday that the breakdown in the auction-rate securities market was just as much a "Main Street" problem as a "Wall Street" problem.

"This is not an abstract financial issue," he said. "These are real people, and the denominations [in which dealers] sold auction-rate securities dropped over time so relatively small investors" could participate in the market.

Separately Thursday, Merrill Lynch offered to buy back auction-rate securities from retail customers for a one-year period beginning in January.

"Our clients have been caught in an unprecedented liquidity crisis," Merrill chief executive John Thain said in a statement. "We are solving it by giving them the option of selling their positions to us."

Merrill was sued last month by the top securities regulator in Massachusetts, who made allegations similar to those that Cuomo pursued against Citigroup.

Merrill's retail clients hold about $12 billion of auction-rate securities. That balance should fall to less than $10 billion by the time the repurchase offers are extended next year, as a result of expected redemptions by issuers, the firm said. The company does not expect the repurchases to have a material impact on its financials.

Robert Heim, a former SEC assistant regional director in New York, said the settlement with Citigroup could put additional pressure on UBS to settle with Cuomo.

"The investment-management business is very competitive, and customers will look to see which [firms] are more friendly toward investors and possibly more compliant with regulators' requests and concerns," said Heim, now a partner in the New York law firm Meyers & Heim.

UBS last month said it was developing a system to buy back as much as $3.5 billion of auction-rate preferred stock -- shares with dividends that are reset weekly or monthly -- from advisory and brokerage clients who have been unable to sell the securities because of the failed auctions.

UBS was sued less than two weeks later by Cuomo, who alleged that as the market showed signs of trouble, the firm continued to tell clients the securities were safe investments even as several UBS officials dumped the securities from their personal accounts.

In a statement after the announcement of the Citigroup settlement, UBS said it was "consistently working with regulators toward a comprehensive solution for all auction-rate securities investors."

A UBS spokesman declined to comment further.