Citigroup sued over auction rate securities

By Emily Chasan

NEW YORK (Reuters) - Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) was sued on Thursday by two clients accusing the financial institution of failing to properly disclose the risks of investing in auction rate securities.

The lawsuits, filed in U.S. District Court in Manhattan, seek class action status. They also accused the company of artificially supporting the auctions.

Auction rate securities are bonds that banks typically pitched as a safe alternative to cash. They are long-term securities, but the investment banks hold periodic auctions to set the interest rates, giving holders the option to sell their securities.

But in recent months as the credit market tightened and auctions failed to attract bidders, investors found themselves holding securities they thought would act like cash.

"The collapse of the auction rate securities market ... was a direct result of defendants' unilateral decision to no longer artificially support the auction rate securities market," plaintiff Lisa Swanson, who purchased auction rate securities in 2006, claimed in one suit.

Both suits are seeking compensatory damages for plaintiffs and all those who bought auction rate securities between March 2003 and February 2008.

"We believe the lawsuits are without merit and we will defend against them," Citi spokesman Alex Samuelson said.

Citi is the latest major broker to face litigation over its marketing of auction rate securities. Similar lawsuits have also been filed against Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz), Merrill Lynch & Co Inc (MER.N: Quote, Profile, Research, Stock Buzz), UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz), TD Ameritrade Holding Corp (AMTD.O: Quote, Profile, Research, Stock Buzz) and Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz).

(Editing by Toni Reinhold/Andre Grenon)