Two Citigroup affiliates today agreed to pay nearly $180 million to settle the Securities and Exchange Commission (SEC) charges that they defrauded investors in two hedge funds that collapsed during the 2008 financial crisis by representing the funds were safe and appropriate for traditional bond investors.
According to the SEC's order settling the matter, Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) misrepresented the ASTA/MAT and the Falcon funds, which collectively raised $2.8 billion in investment capital from approximately 4,000 investors before collapsing in 2008.
Even as the funds began to crumble, additional investments were accepted. The SEC alleged the Citigroup units failed to disclose their deteriorate condition go as far as to assure investors the funds were low-risk, well-capitalized investments with good liquidity. In fact, many of the representation made by the firms' employees directly conflicted with
According to the SEC, the alleged fraud took place from 2002 until the funds' collapse in 2008.
According to the SEC, the ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and used a Treasury or Libor swap to hedge interest rate risks, and the Falcon fund was a multistrategy fund that invested in ASTA/MAT and other fixed-income strategies and asset-backed securities.
Both highly leveraged funds were managed by CAI and sold exclusively to advisory clients of Citi Private Bank and Smith Barney by financial advisers associated with CGMI. As a result, investors in the funds paid fees for two tiers of investment advice, first from the financial advisers and then from the fund manager.
The SEC alleges that the financial advisers and fund manager told investors that the funds were safe, low-risk bond substitutes even though firm marketing documents stated that the funds should not be viewed as bond substitutes. The SEC also alleged the two Citi units failed to control those misrepresentations or implement policies and procedures that would have done so.
The two firms, as is typical neither admitted to nor denied the SEC's charges, agreed to bear all costs of distributing the $180 million in settlement funds to the funds investors who suffered damages.
The experienced securities litigation attorneys at Colling Gilbert Wright & Carter have litigated and resolved hundreds of FINRA arbitration claims over questionable Wall Street practices. If you believe you lost money due to misrepresentations or fraud on the part of your FINRA registered broker dealer, please contact us for a free case evaluation.