UPDATE 2-Citigroup punished by Pennsylvania on auction-rate
* Hundreds of millions of dollars of debt subject to order
* Bank accused of "unethical or dishonest" practices (Adds Citigroup comment, paragraph 6)
NEW YORK, July 14 (Reuters) - Citigroup Inc (C.N) was ordered by Pennsylvania to pay a $2.31 million penalty and repurchase hundreds of millions of dollars of illiquid auction-rate debt from more than 1,200 retail investors in the state.
The third-largest U.S. bank is among many securities firms that have agreed to buy back more than $60 billion of the debt, after the $330 billion market froze in February 2008 when dealers stopped taking part in auctions where rates are set.
Tuesday's order by the Pennsylvania Securities Commission requires Citigroup to offer to repurchase auction-rate debt from retail investors in the state who held the debt as of Jan. 21, 2008. Pennsylvania said the order does not cover 167 institutional investors that owned the debt at the time.
Regulators have accused brokerages of misleading investors into using the debt as a cash substitute. After the market froze, many investors either could not sell the debt or could sell it only at a loss.
Robert Lam, the commission's chairman, said Citigroup was responsible for "unethical or dishonest business practices" and for failing to supervise brokers who sold the debt.
Danielle Romero-Apsilos, a Citigroup spokeswoman, said the New York-based bank is pleased to settle, and remains committed to providing liquidity to clients. (Reporting by Jonathan Stempel; Editing by Steve Orlofsky and Tim Dobbyn)
