SEC Finalizes $30 Billion ARS Settlements, Largest in SEC History

The SEC announced today that it has finalized settlements with Citigroup Global Markets, Inc. (C) 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 SEC stated that the settlements “resolve the SEC’s charges that both firms misled investors regarding the liquidity risks associated with auction rate securities that they underwrote, marketed and sold.”

According to the SEC’s complaints, filed in the SDNY, Citi and UBS misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money markets. According to the complaints, in late 2007 and early 2008, the firms knew that the ARS market was deteriorating, causing the firms to have to purchase additional inventory to prevent failed auctions. 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. The complaints allege that Citi and UBS failed to make their customers aware of these risks.

In mid-February 2008, according to the complaints, 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.

“Today’s settlements are the largest in SEC history, and represent the largest return of customer money in the agency’s 75 years,” said SEC Chairman Christopher Cox. “The Commission’s prompt action after the auction rate securities market froze in February of this year, which led to last summer’s settlements in principle, 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.”

Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement, said the SEC is still finalizing four other settlements-in-principle that the Division has entered into with Bank of America, RBC Capital Markets, Merrill Lynch and Wachovia.

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.

Read the SEC’s press release

Read the SEC’s complaint against Citigroup

Read the SEC’s complaint against UBS