Linda Chatman Thomsen
Director, Division of Enforcement
U.S. Securities and Exchange Commission
August 7, 2008
Good morning. I am Linda Thomsen, the Director of the Division of Enforcement of the Securities and Exchange Commission. With me today are some of the members of a terrific team of talented and dedicated staff members. We are here to announce an agreement in principle with Citigroup Global Markets, Inc. in connection with its sales of auction rate securities. Citi was a significant marketer of action rate securities; its sales accounted for over one-fifth of the auction rate securities market. This agreement, which is subject to finalization of terms and review and approval by the Commission, will provide real liquidity relief to tens of thousands of investors. This agreement in principle is compatible with similar agreements Citi has reached with the North American Securities Administrators Association (NASAA) and the Office of the Attorney General of New York, which are being announced as we speak in New York. Some of the members of the SEC team are there with representatives of the New York Attorney General’s Office and NASAA. These several agreements are the result of a coordinated effort by the states, the Financial Industry Regulatory Association (FINRA), and the enforcement staff of the Securities and Exchange Commission to bring their various tools and talents to investigate the facts of Citi’s conduct and to bring meaningful relief to investors.
Under the terms of the agreement in principle, Citi will agree, without admitting or denying the allegations, to be enjoined from violations of Section 15C of the Securities Exchange Act. The conduct underlying the proposed charges stems from Citi’s marketing of auction rate securities as highly liquid investments. In reality, there were serious liquidity risks associated with auction rate securities. When those risks became a reality in February 2008, and the markets seized up, thousands of Citi’s customers were left holding illiquid securities. As a result, for many investors, their ability to provide for themselves and their families has been undermined.
I’d like to highlight some of the key aspects of the relief this agreement provides to investors:
First, beginning immediately, Citi will offer to purchase at par – 100 percent of the purchase price – the nearly $7.5 billion dollars worth of auction rate securities it sold to 38,000 individual, retail, charity and small business customers. As I said, the offers will begin to go out immediately and the purchases from customers who accept the offer will begin in a matter of weeks. The process is to be completed within 90 days.
Second, other relief will be available to retail customers. For example, if any individual customer has sold securities in the secondary market after the crash of the ARS market in February of this year below par, Citi will make up the difference. Citi will also offer loans at what amounts to zero interest in the event a customer needs liquidity faster than the 90-day redemption period.
Third, for customers who seek consequential damages arising out of the lack of liquidity of their ARS investments, loss of earnest money for example, FINRA’s Office of Dispute Resolution will provide an optional special arbitration process. In this streamlined process, the costs of the process will be born by Citi, and Citi will not be able to contest liability but may contest the existence and amount of consequential damages. Susan Merrill, the Enforcement Director at FINRA will be addressing this in just a moment.
Fourth, for Citi’s institutional customers who are not covered in the 90-day redemption offer, and who hold an additional nearly $12 billion worth of securities, Citi will use its best efforts to provide liquidity and other relief to these customers by the end of 2009. Citi will regularly report on its progress and will not be able to sell any particular auction rate security it holds in its own inventory until it has worked out a liquidity solution for its customers holding those same securities.
Finally, Citi faces the prospect of an SEC financial penalty. The Commission will consider whether, and in what amount, to impose a penalty on Citi after Citi has completed the steps required by this agreement. At that time, the Commission will consider the factors it traditionally considers in assessing penalties including the extent to which victims have been made whole and the nature and extent of other remedies Citi is liable for. The prospect of this potential penalty is meant to provide additional incentive to, and assurance that, investors will be made whole.
This investigation is continuing as are other investigations related to action rate securities. These investigations are being conducted not only by enforcement staff at the SEC, but also by investigative staff throughout the states and by FINRA. We are all working together for the benefit of investors. I want to congratulate all of those who have contributed to today’s events. In particular Karen Tyler, President of NASAA, and her team including Bennett Zivley and Ronak Patel from Texas and Rick Barry from New Jersey; and the Attorney General for the State of New York Andrew Cuomo and his team including Eric Corngold, David Markowitz, Peter Dean, Armen Morian and Vicki Andreadis. I also want to thank FINRA for providing the special arbitration process for this agreement as well as commend FINRA for its continuing investigations. As always, those of us in Enforcement have depended on the remarkable expertise and generous support of our colleagues throughout the Commission. Included among them are the members of the Subprime Task Force and especially our colleagues in the Division of Trading and Markets. Of course, we are extremely grateful for the Commission’s support of our work and for its steadfast commitment to protecting investors. Finally, I want to say how very proud I am of the fantastic SEC team that has worked so hard on this matter – Rick Firestone, Ken Lench, Andrew Sporkin, Jonathan Taylor, Melissa Lamb, Matt Finnegan, Bonnie Kartzman, Jennifer Brannan, Mark Yost, Joan McKown, George Curtis and Scott Friestad.
It’s now my privilege to introduce Susan Merrill, FINRA’s enforcement director.