New York attorney general may charge Citigroup over auction-rate securities

Auction-rate securities have their interest rates set at periodic auctions, depending on the submitted bids. The investments were once considered safe, but the market collapsed in February amid turmoil in the credit markets.

Citigroup is the latest bank to disclose that regulators are seeking information on its sales of auction-rate securities. In May, Wachovia Corp. disclosed that it had received requests from the SEC about auction-rate securities sales.

New York sued UBS on July 24 over the same matter, and states including Massachusetts and Texas have filed similar complaints. All of them accuse the Swiss bank of fraudulently promoting tens of billions of dollars of auction-rate securities as safe when it knew a crisis was brewing.

In a letter to Citigroup's counsel, Cuomo said the bank destroyed documents and tapes that were under subpoena during a five-month investigation by his office. He said the bank "initially failed to notify the New York Attorney General's Office about the destruction of the tapes even though Citigroup learned in mid-June that recordings of its auction rate desk had been destroyed."

However, Cuomo held the door open for a possible settlement if Citi met several requirements. Citi must buy back retail investors' securities "in the immediate future," reimburse them for damages, undertake immediately to make institutional investors and corporations whole and pay "a significant penalty" for misconduct during the investigation, he said.

Citigroup, the nation's largest bank by assets, said it was focused on working with regulators and other market participants to "find an industrywide solution to auction rate securities issues." The bank said in a statement that it was working with Cuomo and other regulators to find a solution.

"Citi has acted in good faith and in the best interests of our clients both before and since auctions began to fail, and there is simply no basis for claims to the contrary," the company said.

As for the tapes, Citigroup said it routinely "recycles tapes" and that their destruction was inadvertent. The bank said it had since "suspended all recycling of tapes and preserved all existing tapes."

Shares of the bank rose 18 cents to $18.87.