Citigroup agrees to pay $200,000 settlement

SEC charges stem from Legg auctions

May 08, 2007|By Laura Smitherman | Laura Smitherman,Sun reporter

Citigroup Inc. agreed to pay $200,000 to settle regulatory charges that the Legg Mason Wood Walker brokerage it acquired two years ago manipulated bond auctions, the Securities and Exchange Commission announced yesterday.

It follows similar settlements reached last year with 15 financial service companies, including Citigroup, Goldman Sachs Group and Merrill Lynch & Co., that together agreed to pay $13 million. The cases involve the $200 billion market for "auction rate securities," which are municipal bonds, corporate bonds and preferred stock with interest rates or dividend yields that are periodically reset through auctions.

The SEC has conducted a three-year investigation of the securities market and found industrywide violations.

"There were a number of illegal practices occurring in those auctions by virtually the entire market," said Kenneth R. Lench, an assistant director of enforcement at the agency.

Regulators allege that Legg Mason Wood Walker failed to disclose that it made bids for its own account to prevent auctions from failing. By doing so, the firm sometimes affected the clearing rate that determines the interest rate or yield a securities issuer must pay to investors, according to the SEC. When it lowered the clearing rate, investors received a lower rate of return.

The conduct occurred from at least January 2003 to June 2004 - before Citigroup acquired the brokerage in 2005 through a business swap with Baltimore-based Legg Mason Inc. New York-based Citigroup agreed to the penalty without admitting or denying wrongdoing. It is customary for an acquirer to inherit legal issues when buying a company.

"We are committed to ensuring our auction practices meet the highest industry standards and believe in the appropriateness of the practices on our desk," said Citigroup spokesman Brian Steel, referring to the broker desk that currently handles the auctions.

Auction rate securities were first developed in the 1980s and have mostly been bought and sold by institutional investors until recently, when smaller, and typically wealthy, investors also have entered the market. The minimum investment is usually $25,000.

According to the SEC order, regulators took into consideration that Legg Mason Wood Walker had a small share of the market when determining the penalty. But regulators also considered the fact that the brokerage reported its practices later than other broker dealers. The penalty was in the middle of a two-tier settlement system for the cases brought last year.

The SEC also settled in January with a subsidiary of Deutsche Bank AG, the Bank of New York Co. and Wilmington Trust Co., which together agreed to pay $1.6 million. The firms acted as auction agents and accepted new or revised bids after the submission deadline and allowed broker dealers to submit bids to prevent failed auctions, according to the SEC.

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