Citigroup Affiliates to Repay Investors $180M After SEC Investigation

On August 17, two affiliates of Citigroup agreed to pay nearly $180 million in restitution and fines to the U.S. Securities and Exchange Commission as part of a settlement arising from two now-defunct hedge funds. According to an SEC administrative order, the two funds misled thousands of investors as to their actual risks. When the funds later collapsed, investors lost billions of dollars.

The two funds were known as ASTA/MAT and Falcon. Both funds were managed by Citigroup Alternative Investments, Inc. (CAI), while Citigroup Global Markets, Inc. (CGMI) oversaw two groups of financial advisers who marketed the funds to investors. According to the SEC, CAI and CGMI raised approximately $2.9 billion from 4,000 investors between 2002 and 2008.

The SEC alleged CAI and CGMI “misrepresented the funds’ risks and performances to advisory clients, who were told the investments were ‘safe’, ‘low-risk’, ‘bond substitutes’ and suitable for traditional bond investors.” In fact, the SEC said the funds’ own marketing documents made it clear the ASTA/MAT and Falcon funds “should not be viewed” as substitutes for municipal bonds. But CAI and CGMI employees allegedly “orally minimized the significant risk of loss” arising from the funds’ leveraged investment strategies.

In effect, the SEC said Citigroup’s investment advisers encouraged clients to sell their traditional bond portfolios and invest in the riskier ASTA/MAT and Falcon funds. While telling customers the risk was minimal, the SEC said CAI knew better. For example, the SEC said CAI “performed back-testing on a hypothetical ASTA/MAT portfolio to evaluate the funds’ performance over a period of time.” In one such test, assessing the fund’s performance over a five-year period, CAI discovered the hypothetical portfolio declined in value by nearly 48%. However, the SEC said financial advisers told prospective clients the test only showed, at worst, a 7% decline.

And things only got worse for the funds as the global financial crisis of 2007-2008 emerged. The SEC noted the Falcon fund began having liquidity problems in August 2007, leading to the sale of $2 billion in assets. The SEC said during this period, CAI continued to sell shares in the Falcon fund without disclosing these sales or other ongoing liquidity issues.

The ASTA/MAT fund had similar problems. The SEC said the fund manager began selling assets in late 2007 “to survive a declining market.” Yet investors were still told the risks were minimal “just weeks before the fund collapsed.”

The SEC ultimately cited CAI and CGMI for their collective failure to “adopt and implement policies and procedures to prevent the misrepresentations made to investors.” As the head of the SEC’s Enforcement Division said in a press statement, “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.”

In settling the SEC’s charges, neither CAI or CGMI admitted any wrongdoing. However, they still agreed to pay $139.9 in disgorgement plus an additional $39.6 million in prejudgment interest. The disgorged funds will be distributed to investors harmed by CAI and CGMI’s alleged misconduct. The two companies also agreed to pay any costs in administering the investor refunds.

If you have lost money as the result of a hedge fund manager’s misrepresentations, it is important to seek advice from an experienced Florida securities fraud attorney. Contact Gregory Tendrich, P.A., in Boca Raton today if you need to speak with someone right away.