Citigroup Inc. is in negotiations with state and federal regulators to resolve allegations of wrongdoing in the auction-rate-securities market that could result in its buying back several billion dollars of the illiquid securities from investors and paying a sizable fine, according to people familiar with the matter.
New York Attorney General Andrew Cuomo last week threatened to sue Citigroup for alleged fraud in the marketing and sales of auction-rate securities. Mr. Cuomo's office has said the firm wrongly told customers the securities were safe, liquid and cash-equivalent. It added the firm failed to tell investors that, from August 2007 until earlier this year, the market was kept afloat primarily because the bank placed bids in auctions for the securities.
Citigroup has been in talks this week with representatives from Mr. Cuomo's office, other state securities regulators and the Securities and Exchange Commission, according to people familiar with the matter. Representatives for Mr. Cuomo's office and the SEC declined to comment.
If Citigroup reaches an agreement with regulators, which as of late Tuesday wasn't certain, the firm could be forced to spend more than $5 billion to buy out individuals, charities and other investors whose cash is tied up in the frozen auction-rate-securities market, according to people familiar with the negotiations. It also could include a fine of as much as $100 million, according to these people.
Auction-rate securities are long-term securities with short-term features. The interest rates reset at weekly or monthly auctions run by Wall Street firms.
A spokeswoman for Citigroup, which was one of the largest underwriters of auction-rate securities, declined to comment.