Federal and state securities regulators today announced a preliminary settlement with Citigroup Global Markets over their sale to investors of auction-rate securities that became illiquid when that market collapsed.

The Securities and Exchange Commission's (SEC) Division of Enforcement announced Citi would give individual investors, small businesses, and charities all $7.5 billion of their money back from ARS they purchased from the firm. The agreement also would require Citi to use its best efforts to liquidate by the end of 2009 all of the approximately $12 billion worth of ARS the firm sold to retirement plans and other institutional investors.

The SEC’s announcement followed New York Attorney General Andrew Cuomo’s announcement also today of $100 million settlement with Citi over auction-rate securities.

Under the settlement, Cuomo said Citi would redeem at par the auction-rate securities purchased by retail customers, nonprofits, and small businesses and pay monetary damages to anyone who was forced to sell their ARS at a loss after the market for the securities collapsed in February.

Under the settlement, Citi agreed to pay New York $50 million and the other states in the multi-state ARS investigation $50 million, Cuomo said.

Citi in a statement said the settlement terms and impact will be:

-- By Nov. 5, Citi will offer to purchase at par ARS that are not auctioning from all Citi individual investors, small institutions (as defined by the terms of the settlement), and charities that purchased ARS from Citi prior to February 11, 2008.

-- The par value of the ARS currently eligible for purchase from individual investors, small institutions, and charities totals approximately $7.3 billion. The capital impact of bringing these assets onto Citi's balance sheet is expected to be de minimis.

-- Based on the ARS currently eligible for purchase and our current market value estimates, the difference between the purchase price and the market value is estimated to be in the range of $500 million on a pre-tax basis. The actual pre-tax loss to Citi as of the date of purchase will depend on the market value at that time and the amount of securities purchased.

-- Should individual investors, small institutions, and charities need interim liquidity, they can borrow from Citi the par amount of their ARS on a non-recourse basis. Such loans will become fully due and payable as soon as the proceeds of the par purchase are credited to their account or when the investor declines the purchase offer.

-- Citi will work with issuers and other interested parties to provide liquidity solutions for Citi institutional investor clients. In doing so, Citi will use its best efforts to facilitate issuer redemptions and/or to resolve its institutional investor clients' liquidity concerns through resecuritizations and other means. The New York Attorney General will monitor Citi's progress and, beginning on November 4, 2008, retains the right to take legal action against Citi with respect to its institutional investor clients. The other regulators have entered into a similar arrangement but with a December 31, 2009 date.

-- Citi will refund refinancing fees to municipal ARS issuers that issued ARS in the primary market between August 1, 2007 and February 11, 2008, and refinanced those securities after February 11, 2008.

-- Citi will pay a $50 million fine to the State of New York and a $50 million fine to the other state regulatory agencies.

-- Citi neither admits nor denies allegations of wrongdoing.

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