Structured settlements

Today the SEC resolved charges against Citi and UBS alleging that the two firms misled investors about liquidity risks related to auction-rate securities. The $30 billion settlement is the largest in SEC history and restores liquidity to ARS investors at par value of their holdings.

According to the SEC’s release, Citi will offer to purchase ARS at par from all current or former clients that bought them—even if the customer moved accounts—restoring approximately $7 billion in liquidity to Citi customers who invested in the securities. UBS will do the same, restoring $22.7 billion to its customers. Importantly, “eligible” customers at these firms who have already sold their ARS below par will be eligible for reimbursement as well, according to the release. The SEC’s complaints against the two firms stated that between late 2007 and early 2008, both firms misrepresented the liquidity risks inherent in the securities market by comparing them to highly liquid money market funds, and failed to inform clients that their own growing balance sheet constraints may prevent them from supporting future auctions.

The auction rate-securities market—the obscure corner of the bond market that municipalities, student loan organizations and other institutional investors used for raising capital—was a popular cash storage investment vehicle for wealthier investors. That is, before they froze up in early February of this year. (Read Registered Rep.’s May cover story, A False Sense Of Security, for details of the collapse.) The ensuing liquidity crisis not only caused a lot of pain for investors and institutions that relied on the market for short-term liquidity needs, but it also revealed more problems and conflicts of interest in the market’s structure (despite SEC attention to similar issues in 2005 and 2006). read more