The backlash from institutional investors over auction-rate securities ARS) is causing a world of problems for financial giant Citigroup. Braintree Laboratories, a large Pharmaceutical manufacturer is suing the bank for selling more than $33 million worth of auction-rate securities. Braintree is disputing the sale, which occurred in 2008, and alleging that is was orchestrated at the very same time that federal and state regulators were investigating Citigroup for fraudulent marketing practices relating to auction-rate securities.
In August 2008, in an effort to settle the investigations, Citigroup agreed to buy back as much as $20 billion worth of auction-rate securities from individual investors and small businesses. In addition, the bank paid a $100 million fine. Citigroup also agreed to provide loans to more than 2,500 institutions that held some $12 billion of the securities.
At issue in the Braintree case is the timing of the auction-rate securities sale. As reported in an April 17, 2009 article by Bloomberg, Citigroup apparently sold some of the securities to Braintree on Aug. 6, 2008, just one day prior to its settlement agreement with regulators.
Following the implementation of their buyback program, Citigroup refused to repurchase the auction-rate securities from Braintree which in turn meant that the instruments would remain illiquid and unredeemable until the year 2030. According to the complaint filed by Braintree, Citigroup described the auction-rate securities to Braintree as “seven day rolls” and “government-backed money market investments that could be sold at par at any time on seven days’ notice.”