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Who’s Minding the Store?

Posted by Larry Doyle on April 17, 2009 10:48 AM |

Despite the fact that the Auction Rate Securities market totally froze in February 2008, Citigroup is accused of fraudulently marketing and selling the product even in August 2008. Bloomberg reports, Citigroup Accused of Selling Disguised Auction Bonds.

Just as you never find only one mouse or roach, to think this is the only incident of Citigroup selling disguised Auction Rate Securities would be amazingly naive. If Citigroup were engaged in this fraud in August 2008,  I would also bet that other banks were doing it as well. 

Regrettably, people in desperate straits do desperate things. Similarly, firms desperately in need of cash will also do desperate things. How many other investors purchased disguised bonds? Or, I should say, were sold disguised bonds?

How is it that a situation like this occurs? Internal cops, compliance and sales management, are asleep at the wheel. External cops, our friends at FINRA, are also asleep at the wheel. Who headed FINRA at that point? Our current SEC head, Mary Schapiro.

Bloomberg writes:

Citigroup Inc., which agreed to buy back almost $20 billion in auction-rate securities, was accused in a lawsuit of selling the instruments as money-market investments even while it was under investigation.

Braintree Laboratories Inc., a closely held pharmaceutical company, said the New York-based bank sold it about $33.2 million in auction-rate securities last year that were described as money-market instruments.

“The June 2008 through August 2008 sales of auction-rate securities ran parallel to both Citigroup’s internal investigations into its fraudulent marketing practices and its negotiations with multiple government agencies,” the company said in its complaint filed today in federal court in Boston.

On Aug. 7, Citigroup agreed to buy back as much as $19.5 billion in auction-rate securities from individual customers, charities and small businesses. It paid a $100 million fine, without admitting any wrongdoing, to settle claims by state and federal regulators that it marketed the securities as almost as liquid as cash.

Citigroup sold some of the securities to Braintree on Aug. 6, the day before its settlement announcement, according to the complaint. It described them as “seven day rolls” and “government-backed ‘money market’ investments that could be sold at par at any time on seven days’ notice,” the company said.

Braintree said the securities are illiquid and unredeemable until 2030.

Citigroup refused to buy them back, it said.

“We asked for rescission and Citigroup frivolously invoked its settlement with government agencies as a shield to liability,” Barry S. Pollack, a lawyer for Braintree at Sullivan & Worcester LLP in Boston, said in a phone interview. “The settlement provides for all those who were misled into purchasing them to pursue any remedies under the law.”

The Braintree, Massachusetts-based company has asked the court to award it the full price of the securities and other damages.

These situations should not be handled via arbitration. If this case is found to be true, this is theft. Everybody involved in this complaint is entitled to due process but we are LONG past the time when thefts such as these should be settled merely with fines. The internal and external cops need to be dealt with very aggressively. Additionally, the days of a self-regulatory organization for Wall Street are OVER.

FINRA needs to be restructured!!


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