largest US bank accused of having "repeatedly and persistently committed fraud" by falsely representing to customers that auction-rate debt was safe

In a letter on Friday to Citigroup, David Markowitz, chief of the state's investor protection bureau, accused the largest US bank of having "repeatedly and persistently committed fraud" by falsely representing to customers that auction-rate debt was safe, liquid and the equivalent of cash.He said Citigroup destroyed tapes of phone calls on auction-rate debt that were subject to an April 14 subpoena. The bank learned in mid-June about the tapes, but failed to tell Mr Cuomo's office until June 30, the letter said.
Citigroup said in a statement that recycling tapes was generally its practice. It had inadvertently recycled a tape subject to the subpoena, but as soon as it learned of this, had stopped recycling tapes. "We reported this oversight to the regulators, and we have fully co-operated with them in all aspects of this investigation," it said.Any settlement of the five-month investigation would require the New York-based Citigroup to buy back the affected debt at face value, pay damages to investors, and incur a "significant penalty", the letter to the bank said.
Mr Cuomo sued UBS on July 24 over auction-rate securities, accusing the Swiss bank of a "multibillion dollar fraud" in steering customers into the debt.Auction-rate securities have rates that set periodically. The market was once considered safe, but part of it remains frozen after a February meltdown in which brokerages abandoned their role as buyers of last resort. Citigroup said in the statement that it had acted in the best interests of clients before and since auctions began to fail. Regulators across the US are examining auction-rate sales practices at other companies, including Bank of America and Merrill Lynch.Earlier on Friday, Citigroup said in its quarterly report that the US Securities and Exchange Commission has opened a formal probe into the sale of auction-rate securities.
It said it also was responding to subpoenas from Massachusetts and Texas over the securities.Citigroup spokeswoman Christina Pretto said the bank had been working with issuers, investors and regulators to create liquidity for holders of illiquid auction-rate debt.