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Thursday, August 07, 2008
Citi Reaches Settlement Over Securities Probe
FOXBusiness
Citgroup has reached a settlement with the Securities and Exchange Commission’s Division of Enforcement and New York Attorney General, Andrew Cuomo for more than $7 billion. The settlement mandates the company buy back the auction-rate securities that it sold to its customers.
“This resolution will make a big difference for a lot of people,” Cuomo said in a press conference on Thursday. “Over 40,000 people nationwide…will have securities redeemed and the total value of securities is about $7 billion, so it affects a lot of people, I believe it will help restore confidence in this marketplace and in these difficult financial times it’s a positive resolution that does justice for consumers."
Last week, Cuomo threatened to sue the company for “repeatedly and persistently” omitting and misrepresenting facts when marketing and selling auction-rate securities, according to the Wall Street Journal.
Citi will have three months, or until Nov. 5, to buy back the auction-rate securities from the individual investors, small businesses, and charities that purchased them.
The agreement also requires the Citi “to use its best efforts” to liquidate the near $12 billion in auction-rate securities it sold to institutional investors and retirement plans by the end of 2009.
Citigroup will make two $50 million civil penalty payments; one to the state of New York and the other to the North American Securities Administrators Association.
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Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
