Consumer Affairs | August 26, 2008

California Attorney General Edmund G. Brown Jr. today announced that he has reached a settlement with Citibank after a three-year investigation into the company’s use of an illegal “account sweeping” program.

Nationally, the company took more than $14 million from its customers, including $1.6 million from California residents, through the use of a computer program that wrongfully swept positive account balances from credit-card customer accounts into Citibank’s general fund, Brown said.

“The company knowingly stole from its customers, mostly poor people and the recently deceased, when it designed and implemented the sweeps,” Brown said. “When a whistleblower uncovered the scam and brought it to his superiors, they buried the information and continued the illegal practice.”

Between 1992 and 2003, Citibank employed a computerized “credit sweep” process to automatically remove positive or credit balances from credit-card customer accounts.

An account could show a credit balance if a customer double-paid a bill or returned a purchase for credit. The credit sweeps were done without notifying the customer and without regard for whether the customer had any unpaid balances or other charges owed to Citibank.

The credit sweeps targeted more than 53,000 customers nationwide. All of the affected accounts were in a recovery status, which includes accounts of customers who have died, sought bankruptcy protection, or been the target of litigation or other collection efforts by Citibank.

In July of 2001, a Citibank employee uncovered the practice and brought it to the attention of his superiors. The employee was later fired for discussing the credit sweeps with an internal audit team.

In the words of a Citibank executive, “Stealing from our customers is a business decision, not a legal decision.” The same executive later said that the sweep program could not be stopped because it would reduce the executive bonus pool, Brown charged.

The attorney general's office launched its investigation of Citibank in 2005 to determine whether the company violated the California False Claims Act by filing false holder reports with the California State Controller that omitted any reference to the swept funds. The 3-year investigation led to today’s settlement.

The settlement includes: 

• Permanent injunction – Citibank will be permanently prevented from re-initiating the credit sweeps.

• Refunds to victims – Citibank will refund all improperly swept funds to customers who were victimized by the sweeps. Citibank will also pay California customers 10% interest on the amount taken.

• Penalties – Citibank will pay $3.5 million in damages and civil penalties to the State of California.

• Compliance audit – After Citibank’s refund process is complete, an independent auditor will review Citibank’s work to ensure that it has lived up to its obligations.

Citibank has affirmed that it can identify most of the victims of the credit sweeps and has begun the process of reviewing archived account data and refunding the improperly swept funds going back to 1992.

New York Charges

Earlier this month, Citigroup Global Markets, Inc. and Citi Smith Barney have agreed to settle allegations stemming from its marketing and sales of auction rate securities. The firm marketed and sold auction rate securities as safe, cash-equivalent products, when in fact they faced increasing liquidity risk, a number of states alleged.

New York Attorney General Andrew M. Cuomo hailed the agreement as a turning point for investors nationwide seeking relief from the collapse of the auction rate securities market.

"The settlement sends a resounding message to the entire auction rate securities industry: this type of deceptive behavior will not be tolerated and we will actively seek justice on behalf of investors in auction rate securities," said Cuomo. "Our goal is simple: to get investors back their money, and that's exactly what this deal does."

Under the settlement, Citigroup has agreed to buy back, no later than November 5, 2008, all illiquid auction rate securities from all Citigroup retail customers, charities, and small to mid-sized businesses. These customers, who number approximately 40,000 nationwide, have been unable to sell their securities since February 12, 2008. Their securities are worth more than $7 billion.

Citigroup will also:

fully reimburse all retail investors who sold their auction rate securities at a discount after the market failed;

• consent to a special, public arbitration process to resolve claims of consequential damages suffered by retail investors as a result of not being able to access their funds;

• undertake to expeditiously provide liquidity solutions to all other institutional investors; and

• reimburse all refinancing fees to any New York State municipal issuer who issued auction rate securities through Citigroup since August 1, 2007.

In addition, Citigroup will pay a $50 million civil penalty to the State of New York. The penalty embraces both Citigroup's substantive conduct and its failure to properly comply with its obligations under the Attorney General's Martin Act subpoena.

Citigroup also will pay a separate civil penalty of $50 million to the North American Securities Administrators Association, whose ARS Task Force has been conducting its own series of investigations into the marketing and sale of auction rate securities by broker-dealer firms.