Citi, Merrill To Buy Back ARS It Issued Or Sold

August 8, 2008
By Evelyn Juan and Daisy Maxey
Dow Jones Newswires

Citigroup Inc. (C) and Merrill Lynch & Co. (MER) will purchase only auction-rate securities, or ARS, it had issued or those sold for others, raising the pressure on other major firms to get on the buy-back bandwagon, and leaving some clients who just transferred their accounts to both firms ineligible for the buybacks.

Over the next few months, Citigroup will start purchasing only Smith Barney-sold auction-rate securities, whether they are still at Citi or have been transferred to another firm. Merrill will only buy back those that were purchased at the firm, but were not transferred elsewhere, a company spokeswoman said.

The plight of clients who aren’t eligible for the buyback highlights the repercussions of the increased movement of brokers in the wake of auction-rate securities crisis.

When the auction-rate securities started to fail early this year, it gave unhappy financial advisors more impetus to move elsewhere rather than deal with furious clients whose money were stuck in these securities. When brokers move, they work on transferring most, if not all, of their clients’ accounts with them

Brokers at UBS AG (UBS) unit UBS Wealth Management US particularly had to deal with customers whose money were not only stuck in auction-rate securities, but whose values were written down while rival companies maintained an on-a par valuation of their client’s investments. UBS clients hold an estimated $25 billion in auction-rate securities.

If other firms don’t decide to purchase back auction-rate securities, “it’ll be one more reason to feel like your company is screwing you up,” said a UBS broker. A UBS spokesman said the firm is consistently working with regulators toward a comprehensive solution for all ARS investors.

Auction-rate securities are long-term bonds that behave like short-term debt in that their rates are periodically reset at auction. Until the periodic auctions of these securities failed earlier this year, the securities had long been marketed by financial advisors as liquid, super-safe investments. The auctions are failing because major investment banks such as UBS, Merrill, Goldman Sachs Group Inc. (GS), Citigroup, and Wachovia Corp. (WB) have shied away from trading the securities.

But with Citi’s settlement agreement with federal and state regulators, the firm will buy back at par under $10 billion worth of auction-rate securities, although the firm said it had already liquidated 40% of its client holdings. The buy-back period will close in Nov. 5.

Merrill Lynch’s offer, on the other hand, covers 30,000 clients who hold municipal, closed-end funds and student loan auction-rate securities. The firm will buy back at par $12 billion worth of auction rate securities, although the firm said it has already liquidated 40% of its client holdings.

A Citi spokesman confirmed the firm’s buy-back policy for Smith Barney-sold auction-rate securities but declined to discuss what will happen to clients whose accounts were transferred to Citi from a rival firm.

“The receiving broker is not liable because it’s not really a suitability issue. It’s more of misrepresentation issue by the selling broker,” said Lawrence Klayman, a securities lawyer who represents some clients suing Wall Street firms over auction-rate securities.

Klayman said firms were primarily questioned on how they have marketed and sold the securities so the burden falls on the seller, instead of the broker-dealer where the accounts were transferred.

But still, Jacob Zamansky, a New York-based securities lawyer, said clients shouldn’t be treated disparately so securities transferred and securities sold should be treated the same by on its buy-back policy.

“If they wanted to accept those customers and earn fees from their accounts, they should have redeemed customers who transferred their positions to them,” Zamansky said.

-By Evelyn Juan, Dow Jones Newswires; 416-306-2025; evelyn.juan@dowjones.com

Corrected August 8, 2008 10:28 ET (14:28 GMT)

Citigroup Inc. (C) and Merrill Lynch & Co. (MER) will purchase only auction-rate securities, or ARS, it had issued or those sold for others. Merrill will buy back at par under $10 billion worth of auction-rate securities, although the firm said it had already liquidated 40% of its client holdings.

(An item at 7:25 p.m. EDT Thursday incorrectly said Citigroup and Merrill will only purchase self-issued ARS. It also said Merrill will buy back at par $12 billion worth of auction-rate securities.)

Copyright (c) 2008 Dow Jones & Company, Inc.

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