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Updated from 5:09 p.m. EDT

Merrill Lynch


on late Thursday said it would buy back some $12 billion in auction-rate securities it sold to retail investors, just hours after


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agreed to a more than $7 billion settlement with state and federal authorities related to the faltering market.

Merrill, in a press release issued after the closing bell, said it would between Jan. 15, 2009 and Jan. 15, 2010, buy at par auction rate securities sold to more than 30,000 clients who hold municipal, closed-end funds and student loan auction rate securities. Regulators have been scrutinizing firms' role in marketing the securities as safe investments, since the market froze up in February.

"Our clients have been caught in an unprecedented liquidity crisis," Merrill Chairman and CEO John Thain said in the company statement. "We are solving it by giving them the option of selling their positions to us."

The firm, however, acknowledged "the important role being played" by the

Securities and Exchange Commission

, New York state Attorney General Andrew M. Cuomo, the Massachusetts Securities Division and the North American Securities Administrators Association, all of which were involved in the hefty settlement Citi agreed to earlier in the day. It entered a settlement with the Commonwealth of Massachusetts related to the auction-rate probe earlier this year.

Under the terms of its agreement announced Thursday with the New York State Attorney General and the SEC, Citi has agreed over the next three months to buy back $7.3 billion of illiquid auction-rate securities from approximately 40,000 retail customers, which includes individuals, not-for-profit entities and small businesses, the New York-based bank and regulators say. Customers bought the investments prior to Feb. 11.

Additionally, Citi will pay civil penalties totaling $100 million to the state of New York and to the North American Securities Administrators Association. The organization compiled its own task force to investigate auction-rate securities abuses by broker-dealer firms. NASAA's investigation of Citi was led by the Texas State Securities Board. Citi neither admitted nor denied the allegations of wrongdoing.

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

Auction-rate securities are long-term debt instruments whose interest rate changes at regular intervals. As the credit crunch lingered earlier this year, the market for auction-rate securities collapsed in February, leaving Citi customers holding the bag on roughly $20 billion worth of these illiquid securities, the SEC said.

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The wide-ranging probe into the auction-rate market extends much further than Citi and Merrill.

Bank of America

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said in a quarterly SEC filing on Thursday that it has received subpoenas from several state and federal agencies requesting information regarding the securities. It also said that four class action suits related to the sale of the investments were filed against the company during the second quarter.

The lawsuits are all in connection with purchases of the securities between May 2003 and February of this year and allege that the Charlotte, N.C., bank violated rules regarding the sale and marketing of auction rate securities.

A related "federal action" as well as several Financial Industry Regulatory Authority arbitrations have also been filed in connection with the auction rate securities. The company says it is cooperating fully with the requests.

Also, Massachusetts Attorney General Martha Coakley's office said it had entered into a settlement with

Morgan Stanley

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over what it deemed inappropriate sales of the securities to municipalities in the commonwealth. Merrill and


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entered earlier settlements.


The Financial Times

reported Thursday that UBS was nearing a settlement with state and federal authorities as well, but those talks were less advanced.



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securities office last month

was raided

by a team of 10 securities regulators from Missouri, Illinois, Massachusetts, New Jersey, Pennsylvania and other states in the wider auction-rate probe.

Merrill said in its press release that more than 40% of its auction-rate holdings have already been liquidated. The firm said retail clients currently hold an estimated $12 billion in auction-rate securities, which it expects to be reduced to under $10 billion by January 2009. The firm said it would continue to provide clients attractive loan arrangements to give them needed liquidity, as it had earlier offered.

In its settlement, Citi agreed to liquidate by the end of 2009 all of the $12 billion worth of auction-rate securities that the firm sold to retirement plans and other institutional investors, according to the SEC.

Cuomo's office alleged that Citi was making misrepresentations in its marketing and sales of auction rate securities. Cuomo alleges that Citi marketed and sold auction rate securities as "safe, cash-equivalent products, when in fact they faced increasing liquidity risk," according to a release.

The liquidity of these securities "was premised on Citi providing support bids for auctions it managed when there was not enough customer demand," the SEC said in a release. "When Citi stopped supporting auctions in February 2008, there were widespread auction failures. As a result, thousands of Citi customers were left holding illiquid securities."

The company will also reimburse retail investors who sold their auction-rate securities at a discount after the market failed and consent to a special arbitration process to resolve claims of damages suffered by retail investors from not being able to access their funds, among other things, the Cuomo's office said.

"Our most important focus continues to be on helping our clients," Citi said in a statement. "Since the beginning of the auction rate securities crisis, Citi has worked diligently with issuers, investors, and regulatory authorities to obtain liquidity for holders of illiquid ARS. We have made tremendous progress on these efforts, and, in fact, more than 50% of our retail clients' holdings in ARS have been redeemed or auctioned at par since the crisis began.

"We are pleased to reach this agreement in principle with the New York Attorney General, the Securities and Exchange Commission, and other state regulatory agencies," Citi continued. "We remain committed to continuing our work on initiatives that will secure the best and fastest route to providing liquidity to our clients."

Citi expects the impact of bringing the assets back onto its balance sheet to be "de minimis," it said. It says the difference between the purchase price and the market value for auction-rate securities is estimated in the range of $500 million before taxes. Citi's actual pre-tax loss will depend on the market value at the time of purchase and the amount of securities purchased, it said.

Shares of Citi closed down 6.2% to $18.47. Merrill's stock closed down 8.4% to $26.10, but was off just fractionally in after-hours trading following the announcement.