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SEC Finalizes ARS Settlements With Citigroup And UBS, Providing Nearly $30 Billion in Liquidity to Investors


Washington, D.C., Dec. 11, 2008 — The Securities and Exchange Commission today finalized settlements with Citigroup Global Markets, Inc. (Citi) and UBS Securities LLC and UBS Financial Services, Inc. (UBS) that will provide nearly $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February.

The settlements resolve the SEC's charges that both firms misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, marketed and sold. Previously, on August 7 and 8, 2008, the SEC's Division of Enforcement announced preliminary settlements with Citi and UBS, respectively.

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According to the SEC's complaints, filed in federal court in New York City, Citi and UBS misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets. The complaints allege that Citi and UBS failed to make their customers aware of these risks. In mid-February 2008, according to the complaints, Citi and UBS decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid ARS.

“Today’s settlements are the largest in SEC history, and represent the largest return of customer money in the agency’s 75 years,” said SEC Chairman Christopher Cox. “The Commission’s prompt action after the auction rate securities market froze in February of this year, which led to last summer’s settlements in principle, helped restore liquidity to tens of thousands of investors. Every one of the investors covered by these settlements will be able to receive 100 cents on the dollar on their ARS investments.”

Linda Chatman Thomsen, Director of the SEC's Division of Enforcement, said, "The SEC will continue to aggressively investigate whether other broker-dealers and individuals have failed to disclose to investors material risks about ARS that they marketed and sold. We also look forward to finalizing the four other settlements-in-principle that the Division has entered into with Bank of America, RBC Capital Markets, Merrill Lynch and Wachovia."

The settlements, which are subject to court approval, will restore approximately $7 billion in liquidity to Citi customers who invested in ARS, and $22.7 billion to UBS customers who invested in ARS.

Without admitting or denying the SEC's allegations, Citi and UBS agreed to be permanently enjoined from violations of the broker-dealer fraud provisions and to comply with a number of undertakings, some of which are set forth below. Investors should review the full text of the consents executed by Citi and UBS.

The Citi settlement provides, among other things, that:

  • Citi will offer to purchase ARS at par from individuals, charities, and small businesses that purchased those ARS from Citi, even if those customers moved their accounts.
  • Citi will use its best efforts to provide liquidity solutions for institutional and other customers, including, but not limited to, facilitating issuer redemptions, restructurings, and other reasonable means, and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers.
  • Citi will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
  • Citi will reimburse eligible customers for any excess interest costs associated with loans taken out from Citi due to ARS
  • illiquidity.

The UBS settlement provides, among other things, that:

  • UBS will offer to purchase at par from all current or former UBS customers who held their ARS at UBS as of Feb. 13, 2008, or purchased their ARS at UBS between Oct. 1, 2007 and Feb. 12, 2008, even if they moved their accounts. Different categories of customers will receive offers from UBS at different times.
  • UBS will not liquidate its own inventory of a particular ARS without making that liquidity opportunity available, as soon as practicable, to customers.
  • UBS will pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
  • UBS will reimburse customers for any excess interest costs incurred by using UBS's ARS loan programs.

The Commission wishes to alert investors that, in most instances, they will receive correspondence from Citi and UBS, and that they must advise the respective firm that they elect to participate in these settlements, or they could lose their rights to sell their ARS. Further, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations.

Both Citi and UBS will also be permanently enjoined from violating the provisions of Section 15(c) of the Exchange Act of 1934, which prohibit the use of manipulative or deceptive devices by broker-dealers. Both firms also face the prospect of financial penalties to the Commission. After the buy back periods are substantially complete, the Commission may consider imposing a financial penalty against Citi and/or UBS based on the traditional factors the Commission considers for penalties and based on whether the individual firm has fulfilled its obligations under its settlement agreement.

Customers with questions about these settlements may contact Citi or UBS through the firms' websites, or call the firms at the following toll-free telephone numbers:

  • Citi: 1-866-720-4802
  • UBS: 1-800-253-1974

The SEC notes the substantial assistance and cooperation from the New York Attorney General, the Financial Industry Regulatory Authority (FINRA), the Texas State Securities Board, and the North American Securities Administrators Association (NASAA).

The Commission's investigation of the auction rate securities market is continuing.

# # #

Fredric D. Firestone
Associate Director, SEC's Division of Enforcement
(202) 551-4711

Kenneth R. Lench
Assistant Director, SEC's Division of Enforcement
(202) 551-4938

For additional information, investors may also contact the Commission's Office of Investor Education and Advocacy with inquiries about the settlements at (202) 551-6551 or oiea@sec.gov. Investors and members of the general public may also review further information about ARS at http://www.sec.gov/investor/ars.htm.



Modified: 12/11/2008