Thursday, December 11, 2008
The SEC 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 Commission's Division of Enforcement announced preliminary settlements with Citi and UBS, respectively.
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.
The Citi settlement provides:
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:
UBS will offer to purchase at par from all current or former UBS customers who held their ARS at UBS as of February 13, 2008, or purchased their ARS at UBS between October 1, 2007 and February 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 alerts 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.