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Citigroup Hit with ARS Lawsuit from KV Pharmaceutical Company

Mega bank Citigroup Global Markets is still facing tough times as the company was hit with a lawsuit from major drug company, KV Pharmaceutical. The complaint alleges that the bank misrepresented the risks associated with auction-rate securities (ARS). As a result, KV is now holding $72 million worth of illiquid auction-rate securities and has been forced to eliminate some 700 jobs.

The St. Louis-based drug company filed the lawsuit against Citigroup on Feb. 25. 2009. According to the complaint, Citibank intentionally lied about the ARS investments, characterizing them as safe and adhering to KV’s conservative investing objectives of liquidity and capital preservation.

Between May 2005 and February 2008, Citigroup allegedly advised KV Pharmaceutical to invest in student loan-backed auction-rate securities as an alternative to money-market funds. KV says Citigroup never informed the drug maker that the liquidity of auction-rate securities may be uncertain or that auction failures were a possibility.

The complaint goes on to claim that in late summer 2007, an internal Citigroup e-mail acknowledged severe “disruptions in the ARS market” and that “failed auctions had reached at an all-time high.” These facts were never disclosed to KV Pharmaceutical, however. Instead, KV says Citigroup recommended buying even more auction securities. Following that advice, KV purchased nearly $28 million of auction-rate securities in late November 2007.

The lawsuit filed against Citigroup by an institutional investor, KV Pharmaceutical, is the second following a complaint filed by American Eagle Outfitters on February 6, 2009. The clothing and accessories retailer also sued the bank for fraudulently inducing it to buy $258 million worth of auction-rate securities that can now only be sold at a major loss.