A Citigroup Inc. spokeswoman declined to comment Friday.
In the auction-rate securities market, investors buy and sell instruments that resemble corporate debt, except the interest rates are reset at regular auctions, some as often as once a week. A number of companies invested in the securities because they could treat their holdings almost like cash.
The market for auction rate securities collapsed last February, leaving tens of thousands of investors nationwide holding damaged securities that couldn't be readily sold for cash, according to securities regulators.
Citigroup represented itself as the auction rate securities "market leader" and said it would provide immediate liquidity by selling the securities to other investors, or buying them itself, according to the suit filed Wednesday in U.S. District Court in Pittsburgh by American Eagle Outfitters and its subsidiary, AEO Management Co.
"American Eagle reasonably and justifiably relied to its detriment upon Citi's material misrepresentations and omissions of material fact and fraudulent conduct," the suit said.
Citigroup hid from American Eagle that it had internal limits on how many of the Citigroup-brokered securities it would buy and that the market for Citigroup-brokered securities would collapse when it stopped buying them last February, according to the suit.
Richard Victoria, an attorney for American Eagle, said that despite the auction rate securities problem, the company's financial condition remains strong.
In December, New York-based Citigroup and UBS AG agreed to buy back a total of nearly $30 billion in auction rate securities under a settlement approved by the Securities and Exchange Commission. The banks neither admitted nor denied wrongdoing under the settlements.
American Eagle operates under the brands American Eagle Outfitters, aerie by American Eagle, Martin + Osa, and 77kids. It has more than 1,000 stores and about 30,000 employees in the United States and Canada.
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On The Net:
American Eagle Outfitters: http://www.ae.com
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