Aug. 1 (Bloomberg) -- New York Attorney General Andrew Cuomo plans to sue Citigroup Inc., the largest U.S. bank by assets, after accusing it of ``fraudulent'' tactics in selling auction-rate securities as safe, money market-like investments.

Citigroup destroyed ``documents under subpoena,'' Cuomo said in a ``letter of intent' sent today to the bank following a five-month investigation by his office. He said he plans to ``charge'' the bank under the state's Martin Act, which permits civil suits and criminal action in securities cases. Cuomo offered details for a possible settlement of the matter. He won't sue if his terms, including a fine, are met, spokesman Alex Detrick said.

``The investigation has revealed that Citigroup has repeatedly and persistently committed fraud by making material misrepresentations and omissions in connection with Citigroup's underwriting, distribution and sale of auction-rate securities,'' Cuomo said in the letter.

Citigroup's sale of auction-rate securities also is being investigated by the U.S. Securities and Exchange Commission, the bank said today. Citigroup and other firms that sold the securities have received subpoenas and information requests from state, federal and industry regulators, the bank said in an SEC filing. The states include Massachusetts, New York and Texas, Citigroup said.

Periodic Bidding

Auction-rate securities are typically bonds whose interest rates are reset by periodic bidding. Brokers abandoned their role as buyers of last resort in mid-February, allowing a $330 billion market to collapse, and investors were stuck with bonds they could not sell.

``Citi has acted in good faith and in the best interests of our clients both before and since auctions began to fail, and there is simply no basis for claims to the contrary,'' company spokeswoman Susan Thomson said in a telephone interview.

She said Citigroup was working with regulators and market participants to find an ``industrywide solution'' to the auction-rate securities issues. She said the company was cooperating with regulatory authorities, including Cuomo, ``to secure the best and fastest route to providing liquidity.''

New York sued UBS AG July 24 over the same matter, accusing the bank of ``aggressive marketing'' of auction-rate securities. Massachusetts and Texas filed similar complaints against UBS in an effort to force that firm to repurchase securities it marketed in their states.

`Telephone Conversations'

Cuomo said his office subpoenaed Citigroup ``recordings of telephone conversations concerning the marketing, sale, distribution or auction of auction-rate securities'' on April 14. Citigroup learned in mid-June that its auction-rate desk recordings had been destroyed and later told the attorney general's office that it was not likely to be able to recover the data sought, Cuomo said in his letter.

``Verbatim records of the most important witness statements during the most relevant period were therefore destroyed after the issuance and service of the subpoena,'' Cuomo said.

Citigroup's Thomson said a tape was destroyed unintentionally. ``The recycling of the tape in question was inadvertent,'' she said. After learning of the oversight, Citigroup suspended all recycling of tapes and reported the lapse to regulators, she said.

`Significant Penalty'

Cuomo said he might be willing to settle the matter with Citigroup if it agrees to buy back retail investors' securities ``at par in the immediate future,'' pay them any damages incurred, undertake immediately to make institutional investors and corporations whole and pay ``a significant penalty'' for the alleged misconduct.

John Coffee, professor of securities law at Columbia Law School in New York, said that Citigroup broke a cardinal rule.

``Rule number one in all white-collar representations is, `Don't destroy any documents,'' Coffee said. ``You put yourself in a very dark hole the moment you have to admit documents sought or potentially desired by the government have been destroyed by you. This is a public relations nightmare, and it may be a kind of legal problem that overshadows the merits of the case.''

Citigroup rose 18 cents to $18.87 in New York Stock Exchange composite trading.

To contact the reporter on this story: Karen Freifeld in New York State Supreme Court at kfreifeld@bloomberg.net.

Last Updated: August 1, 2008 18:43 EDT