Citigroup’s (C) imminent charges could wind up packing a wallop for financial exchange traded funds (ETFs).

New York Attorney General Andrew Cuomo has said he plans to charge the bank with fraudulently marketing and selling auction-rate securities, as well as destroying subpoenaed documents, report Joseph A. Giannone and Jonathan Stempel for Reuters.

Cuomo has left open the possibility for a settlement, but any resolution is going to require that Citigroup buy back the affected debt at face value, pay damages and a penalty.

Other financial institutions are under the microscope of regulators, who are looking into auction-rate sales practices. They include many of the top holdings of financial ETFs, such as Bank of America (BAC), Merrill Lynch (MER), UBS AG and Wachovia (WB).

Some ETFs that could be affected as the investigations progress include:

  • Financial Select Sector SPDR (XLF): down 25.4% year-to-date; Bank of America, 7.8%; Citigroup, 5.9%; Wachovia, 2.6%
  • KBW Bank (KBE): down 23% year-to-date; Bank of America, 8.2%; Citigroup, 6.7%; Wachovia, 5.3%
  • iShares MSCI Switzerland (EWL): down 9.7% year-to-date; UBS AG, 4.6%
  • iShares Dow Jones U.S. Financial Services (IYG): down 25.3% year-to-date; Bank of America, 8.8%; Citigroup, 7.5%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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