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CitiGroup, UBS Must Undergo Arbitration with Hospital

Tuesday, August, 7, 2012


CitiGroup and UBS Financial will have to go through arbitration with a former client hospital in Virginia, a federal judge ruled. They went in front of another federal judge to block the action, but the federal judge would not. The hospital is accusing the banks, saying that they propped up the auction rate securities market in the years before 2008.


Who is the Hospital and Why Securities Arbitration?

 

The hospital is known as Carilion Clinic. It is a not-for-profit hospital in Roanoke, VA. In 2005, it consulted with the CitiGroup Global Markets and UBS Financial Services to figure out how to raise money for expansion and renovation. On the advice of UBS and CitiGroup, the health center issued nearly $235 million in auction rate securities, as well as just over $74 million in bonds.

 

Auction rate securities (aka auction rate bonds) are sold in a special way where the minimum interest rates that buyers are willing to pay, can become the new percentage rate for the bonds.


Carilion's Claim in the Financial Arbitration

 

Carilion is claiming that Citi and UBS helped to prop up the actions via their own bidding, which allegedly resulted in more brokerage fees. (They collected over half a million fees every year from Carilion.) The auction securities market collapsed in 2008--incidentally the same year that UBS and CitiGroup stopped bidding in securities auctions.

 

Once that market collapsed, the rates on the securities went way up. The hospital claims it lost millions of dollars just trying to refinance the related debt. In addition to claiming that the two financial institutions were propping up the auctions, the hospital also claims that it would have not issued the securities had it been aware of the propping-up.

 

The hospital filed for financial arbitration via FINRA (the Financial Industries Regulatory Authority) earlier this year. The organization exists largely to arbitrate disputes between brokers and consumers.

 

The two institutions sought to block the arbitration, claiming in part that Carilion was a partner in issuing the securities. U.S. District Judge John Gibney Jr. said that Carilion was clearly a customer and not a partner, as the hospital paid the institutions half a million a year for their services, and that the proceedings could continue.