Personal Injury Law

The Securities and Exchange Commission finalized settlements with Citi and UBS

By Adam Gana

On December 11, 2008, the Securities and Exchange Commission finalized settlements with Citigroup Global Markets, Inc. ("Citi") and UBS Securities LLC and UBS Financial Services, Inc. (collectively "UBS") that will provide approximately $30 billion to tens of thousands of customers who invested in auction rate securities before the market for those securities froze in February. These settlements resolve the SEC's charges that both Citi and UBS misled investors regarding the liquidity risks associated with auction rate securities (ARS) that they underwrote, aggressively marketed, and sold to unknowing investors.

More specifically, Citi and UBS misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets. According to numerous complaints filed throughout the nation, both firms knew that the ARS market was deteriorating, promting Citi and UBS to purchase additional inventory to cover failed auctions. This cyclical purchasing strategy is remeniscent of a traditional ponzi scheme.
At the same time, however, the firms knew that their ability to support auctions by purchasing more ARS had been reduced, as the credit crisis stressed the firms' balance sheets. Neither Citi nor UBS made their customers aware of these risks. In mid-February 2008, Citi and UBS decided to stop supporting the ARS market, leaving tens of thousands of Citi and UBS customers holding tens of billions of dollars in illiquid ARS.
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.
The Citi settlement provides, among other things, that:

• 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, among other things, that:

• UBS will offer to purchase at par from all current or former UBS customers who held their ARS at UBS as of Feb. 13, 2008, or purchased their ARS at UBS between Oct. 1, 2007 and Feb. 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.

SEC Chairman Christopher Cox explained that the Citi and UBS settlements were “the largest in SEC history, and represent[ed] the largest return of customer money in the agency’s 75 years.” The settlement thawed the securities purchases that had been frozen since 2008 and helped restore liquidity to tens of thousands of investors. Every one of the investors covered by these settlements will be able to receive 100 cents on the dollar on their ARS investments. Moreover, if eligible customers incurred consequential damages because of the illiquidity of their ARS, they may participate in special FINRA arbitrations. To get more information about these settlements and maximizing your recovery, please contact Napoli Bern and Ripka LLP.

Full post as published by New York City Personal Injury Lawyer on February 02, 2009 (boomark / email).