New York Attorney General Andrew Cuomo plans to imminently charge Citigroup Inc., accusing it of fraudulently marketing and selling auction-rate securities, and destroying documents that had been subpoenaed.
In a letter on Friday to the largest U.S. bank by assets, David Markowitz, chief of the state's investor protection bureau, accused Citigroup of having "repeatedly and persistently committed fraud" by falsely representing to customers that auction-rate debt was safe, liquid and the equivalent of cash.
He also charged that Citigroup destroyed audiotapes of phone calls on auction-rate debt that were subject to a April 14 subpoena. The New York-based bank learned in mid-June about the destruction, but failed to tell Cuomo's office until June 30, the letter said.
Cuomo has left open the possibility of a settlement, but any resolution must require Citigroup to buy back the affected debt at face value, pay damages to investors, and include a "significant penalty" for its misconduct, the letter said.
A Citigroup spokesman had no immediate comment on the letter.
Auction-rate securities have rates that set periodically. The $330 billion market was once considered safe, but part of it remains frozen after a February meltdown in which brokerages abandoned their role as buyers of last resort.
Regulators nationwide also are examining auction-rate sales practices at other financial services companies, such as Bank of America Corp., Merrill Lynch & Co Inc., UBS AG and Wachovia Corp.
Earlier on Friday, Citigroup revealed in its quarterly report that the U.S. Securities and Exchange Commission has opened a formal probe, which gives it subpoena power, into the sale of auction-rate securities.
SEC spokesman Kevin Callahan declined to comment. Citigroup said it also is responding to subpoenas from Massachusetts and Texas over the securities.
Citigroup spokeswoman Christina Pretto said the bank is cooperating with the various probes, and has been working with issuers, investors and regulators to create liquidity for holders of illiquid auction-rate debt.
Separately, Citigroup said it is cooperating with government and regulatory requests regarding its Falcon fixed-income and its ASTA and MAT municipal arbitrage funds.
Citigroup in February provided a $500 million credit line to the Falcon funds, and in March invested $661 million in its Municipal Opportunity funds, which accept investments through ASTA and MAT. It moved the Falcon and Municipal Opportunity funds onto its balance sheet because of these commitments.
