Citigroup, JPMorgan, Merrill Sued Over Auction Securities

The agency that runs the Manhattan neighborhood that houses Goldman Sachs Group Inc.’s headquarters sued three banks seeking more than $50 million over the issuance of auction-rate securities.

The Battery Park City Authority filed the suit on Feb. 7 in New York State Supreme Court in Manhattan against Citigroup Global Markets Inc.; J.P. Morgan Securities Inc.; and Bank of America Corp.’s Merrill Lynch, Pierce, Fenner & Smith in connection with the authority’s 2003 issuance of $635 million in auction-rate securities to finance debt.

The authority accused the defendants, the underwriters and broker-dealers for the securities, of failing to disclose facts about the structure and market of the bonds and creating “the artificial appearance of an efficient market” by placing their own bids in every auction in which they were the lead broker-dealer, according to a court filing.

The defendants “did not disclose their full use of these bids, known as support or cover bids, thereby making material misrepresentations and/or omissions to plaintiff,” the authority said in the filing.

Auction-rate securities are municipal bonds, corporate bonds and preferred stocks whose rates of return are periodically reset through auctions.

The market was worth $330 billion before it collapsed during the credit crisis as demand faltered and dealers stopped stepping in as buyers of last resort. Investors who held the debt were unable to sell.

Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup Inc.; William Halldin, a spokesman for Bank of America, based in Charlotte, North Carolina; and Brian Marchiony, a spokesman for New York-based JPMorgan Chase & Co., declined to comment on the suit.

The case is Battery Park City Authority v. Citigroup Global Markets Inc., 650430/2014, New York State Supreme Court, New York County (Manhattan).

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