2 Banks Will Buy Back $17 Billion in Securities

Two Wall Street giants agreed on Thursday to buy back more than $17 billion of auction-rate securities that were improperly sold to retail customers, likely paving the way for other banks and brokerage firms to take similar actions.

Citigroup reached a settlement Thursday morning with state and federal regulators, agreeing to buy back about $7.3 billion of auction-rate securities that it sold to retail customers and pay a $100 million fine for its conduct.

Merrill Lynch said it would buy back about $10 billion in auction-rate investments that it sold to retail investors, a move that gets ahead of regulators investigating the company.

Neither firm agreed to reimburse institutional investors, though both said they were trying to resolve similar problems with those customers.

Regulators have been investigating at least a dozen Wall Street firms for their role in the sales and marketing of so-called auction-rate investments, and analysts expect a wave of settlements in the next few months.

Bank of America, the largest retail bank, said Thursday that it had also received subpoenas from federal and state regulators related to sales of auction-rate securities. The investments are preferred shares or debt instruments with rates that reset regularly, usually every week, in auctions overseen by the brokerage firms that originally sold them.

The $300 billion market for the investments collapsed in February, trapping investors who had been told that the securities were safe and easy to cash in.

Citigroup’s settlement with state and federal regulators included a fine of as much as $100 million.

In a statement, the New York attorney general Andrew Cuomo said that Citigroup would buy back, by Nov. 5. auction-rate securities from individual investors, charities and small- and mid-sized businesses. These customers, about 40,000 nationwide, have been unable to sell their securities since Feb. 12, the statement said.

In a similar case in Massachusetts, Morgan Stanley reached an agreement with the attorney’s general office on Thursday to reimburse the cities of New Bedford and Hopkinton $1.5 million for the investments in the securities, the Massachusetts attorney general Martha Coakley said in a statement.

As part of the settlement, Citigroup agreed to a public arbitration process to resolve claims of consequential damages suffered by retail investors.

The bank, one of Wall Street’s biggest auction-rate securities dealers, will pay the $100 million to the New York attorney general’s office and a task force of 12 state regulators, led by the Texas State Securities Board. Each group would exact a $50 million penalty.

The federal Securities and Exchange Commission also participated in the settlement talks but elected not to exact a penalty, pending its own investigation.

The settlement follows several days of meetings between Citigroup and the state and federal regulators, and reflects Citigroup’s desire to put its auction-rate securities troubles behind it.

Thursday’s settlement has implications for other Wall Street firms, with the Citigroup deal serving as a benchmark for the industry. Two other banks, UBS and Merrill Lynch, are under investigation by several groups of regulators. But unlike Citigroup, UBS faces additional accusations that at least one of its executives engaged in insider trading.

Citigroup shares were down about 3.5 percent Thursday; Morgan Stanley shares were down less than one percent.