By  on February 9, 2009

American Eagle Outfitters Inc. last week filed a lawsuit against Citigroup Global Markets alleging that Citigroup “induced” the specialty chain to buy $258 million worth of auction rate securities that turned sour.

The lawsuit, filed on Wednesday in federal district court in Pittsburgh, alleged that Citigroup made “false and misleading statements” by representing that the securities were safe and liquid instruments suitable to the retailer’s “conservative investment policies.” The plaintiffs charged that Citigroup knew of the loss of liquidity for the securities and “sought to conceal” that information from the retailer.

A spokeswoman for Citigroup on Friday declined comment.

Auction rate securities are long-term bonds and preferred stock with interest rates or dividend yields that are reset through periodic auctions. The ARS market collapsed in February 2007.

The complaint said American Eagle keeps “substantial funds readily available in the form of cash or highly liquid assets with which to satisfy a variety of business contingencies.”

Because of the illiquidity of the securities, American Eagle said it is “unable to access this substantial portion of its cash, causing the company to turn to borrowed funds to ensure uninterrupted operations.” The lawsuit also said it had been “forced to reduce its business activities and forgo strategic transactions due to the lack of immediately available capital.”

The lawsuit includes allegations of fraud under federal and state laws and negligent misrepresentation. American Eagle is seeking compensatory and punitive damages and a rescission, or an undoing, of all ARS purchases.

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