Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, May 7, 2007

Citigroup Settles Auction Rate Securities Markets Violations

On May 7, the Commission  announced  the  institution  of  proceedings concerning Legg Mason Wood Walker Inc.'s  violative  practice  in  the $200  billion  plus  auction  rate  securities  market.  Auction  rate securities are municipal bonds, corporate bonds  or  preferred  stocks with interest rates or dividend yields that  are  periodically  re-set through Dutch auctions.  The  named  respondent  is  Citigroup  Global Markets Inc. as the successor by merger to Legg Mason Wood Walker, but the proceeding concerns Legg Mason Wood Walker's conduct prior to  the merger.  Simultaneously  with  the  institution  of  the  proceedings, Citigroup Global Markets consented  to  the  entry  of  an  SEC  order providing for a censure and a $200,000 penalty, without  admitting  or denying the findings in the order.  The SEC order finds that, between January 2003  and  June  2004,  Legg Mason  Wood  Walker  intervened  in  auctions  by  bidding   for   its proprietary  account  to  prevent  failed  auctions  without  adequate disclosure. In those instances when this practice lowered the clearing rate of an auction, investors received a lower rate of return on their investments. Also,  because  Legg  Mason  Wood  Walker  was  under  no obligation to guarantee against a failed auction,  investors  may  not    have been aware of the liquidity  and  credit  risks  associated  with certain securities. By  engaging  in  this  practice,  the  respondent  willfully violated Section 17(a)(2) of the  Securities  Act  of  1933, which prohibits material misstatements and omissions in any  offer  or sale of securities.  Citigroup Global Markets already  is  subject  to  a  cease-and-desist order from a settlement that  it  and  fourteen  other  broker-dealers entered into last year  with  the  SEC  concerning  violative  auction practices.

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