SEC Announces Citigroup Affiliates to Pay $180 Million in Hedge Fund Fraud Settlement

Affiliates allegedly defrauded traditional bond investors

Following allegations and an investigation by the Securities and Exchange Commission (SEC), two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in two hedge funds. The firms are accused of claiming the hedge funds in question were safe, low-risk and appropriate for traditional bond investors, when in fact, the funds were in dire condition.

According to the SEC press release, Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) neither admitted to nor denied the SEC’s charges, but agreed to bear all costs of distributing the $180 million in settlement funds to harmed investors.

The two funds in question are the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing in 2008.

The affiliates are accused of not disclosing the very real risks of the funds, even as they were beginning to collapse. In fact, it is reported that CAI accepted nearly $110 million in additional investments and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. These assurances allegedly made by Citigroup employees were in conflict with written marketing and support documents provided to investors, according to the SEC release.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

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 multi-strategy fund that invested in ASTA/MAT and other fixed income strategies and asset-back securities. Both were purported to be highly leveraged and sold exclusively to clients of Citigroup Private Bank or Smith Barney by financial advisers of CGMI, while both funds were managed by CAI. As a result, financial advisors of CGMI collected advisory fees, while the fund manager, CAI, collected additional fees – all from the same investors. In effect, the investors paid two sets of advisory fees.

It is alleged that both CGMI and CAI failed to control the misrepresentations their employees made to investors by minimizing the potential risk of loss of based on the funds’ investment strategy and use of leverage. Both firms agreed to be censured and agreed to cease and desist from future violations.

Scott Silver of Silver Law Group represented a number of individuals in securities arbitration claims who suffered losses in these particular Citigroup funds. If you are an investor who has been adversely affected by Citigroup, its affiliates, or any financial adviser or firm, Silver Law may be able to help you recover your losses through securities arbitration. For more information, contact us today.