Mellon Capital Markets LLC will pay a $1.3 million settlement to Texas, New York and Florida for its alleged role in a scheme to lower borrowing costs for Citizens Property Insurance Corp. of Florida, according to the Texas State Securities Board. Texas will receive $500,000 of the settlement.

The state alleged that Mellon Financial Markets, now a unit of Bank of New York Mellon Corp., helped Citizens to manipulate the interest rate on its auction-rate securities by accepting and placing bids on behalf of Citizens, a state-run entity that is the biggest home insurer in the state by a number of properties covered.

The interest rate on auction-rate securities is reset at auctions that typically take place every seven or 28 days. The agency said investors earned $6.7 million less in interest than they would have if Citizens hadn't bid in its own auctions.

The Texas State Securities Board alleged that, in January 2008, Citizens asked a Mellon Financial Markets broker to help it bid on the company's own auction-rate securities and to conceal the fact it was doing so. The broker's supervisor didn't seek legal advice or discuss the issue with Mellon Financial Markets' compliance department.

BNY Mellon Capital Markets said, in a statement, that is was "pleased to have resolved this matter, which centered on the isolated conduct of three individuals who are no longer with the company."

N.Y. State Attorney General Eric T. Schneiderman credited Bank of New York for performing an internal investigation, sharing its findings with the states and disciplining the employees responsible.

Asked Thursday if disciplinary action was taken at Citizens, a spokeswoman for the Florida Office of Financial Regulation, which helped in the probe, noted that a senior executive at the insurance company had sought counsel from outside lawyers in advance of the insurer talking to a Mellon Financial Markets broker about the bidding activity. Texas's consent order noted that the Citizens executive had told Mellon Financial Markets that the insurer had "cleared" its "ability and authority" to purchase its securities "through counsel."

A spokesman for the state insurance office didn't have immediate comment, and Citizens Property couldn't immediately be reached for comment.

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