Citigroup Continued to Sell Auction-Rate Securities Despite Knowledge of "Cracks Forming in the Market"
The SEC recently sued Citigroup Global Markets for continuing to sell massive amounts of auction-rate securities despite the knowledge that “there are definitely cracks forming in the market” and that “inventories are starting to creep higher in the market and failed auction frequency is at an all time high.” The SEC’s complaint alleged that Citigroup continued selling auction-rate securities months after the warning flags concerning auction-rate securities were known at Citigroup. During the fall and winter of 2007, Citigroup had never let an auction fail and was using that fact to assure its clients of the safety and viability of the auction-rate securities market.
According to the SEC, however, Citigroup knew it could not continue to support the auctions due to losses from subprime investments. The SEC complaint references Citigroup internal emails in August 2007 in which officials at Citigroup began raising the idea of letting the auctions fail. Citigroup was also aware at this time of another issue affecting the viability of the auction-rate securities market. The monoline insurers insuring many of the auction-rate securities were also incurring large losses due to the subprime mortgages. According to the SEC, a Citigroup e-mail reflected concerns about the insurers’ problems indicating that such developments could drive away nervous investors from an auction-rate securities market that was already “subject to a potential liquidity crisis.”
Notwithstanding all the warning signs of an impending auction-rate securities market collapse, Citigroup had no problem continuing to push the sale of auction-rate securities. The SEC complaint indicates that Citigroup’s investment bankers wanted to continue to bring new bonds to the market to earn “fees and to maintain their position vis-a’-vis bankers at other broker dealers.” Unfortunately for its customers, what was good for Citigroup was bad for the customer.
Although Citigroup has admitted no wrongdoing, it has agreed to settle the SEC complaint as well as others brought by state regulators by agreeing to buy back more that $7 billion worth of auction-rate securities and pay fines totaling $100 million.
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