The auction-rate securities made life even more difficult for Citigroup and Merrill Lynch last week. Citigroup was busy trying to explain to New York attorney general Andrew Cuomo how some key evidence went missing, and Cuomo was threatening legal action, on destruction of evidence and fraud counts.

Citi stood by its position that it meant no harm to investors, that it is “actively working with regulatory authorities, including the [New York] attorney general, to secure the best and fastest route to providing liquidity,” according to a statement. “Citi has acted in good faith and the best interests of our clients both before and since the auctions began to fail, and there is simply no basis for claims to the contrary.” As to the erasure of evidence—oops. “It is Citi’s practice to recycle tapes. The recycling of the tape in question was inadvertent.” As soon as it discovered the boo-boo Citi “suspended all recycling of tapes and preserved all existing tapes.”

Merrill, meanwhile, was accused by the securities division of the state of Massachusetts of not only defrauding customers but rewriting research to support the sagging and then collapsing auction-rate securities market. The emails show it was done as the managing directors demanded, even as the auctions were dying.

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