Monday, May 7, 2007
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.