Citigroup to Pay Failed HF Investors $180M

Two Citigroup entities have agreed to pay $180 million to settle charges brought by the US regulator relating to two hedge funds.

It is the second settlement Citigroup has made this month relating to investments offered to clients during the financial crisis, following the $13.5 million settlement announced on August 10.

“Firms cannot insulate themselves from liability
for their employees’ misrepresentations by invoking the fine print contained in written disclosures.” —Andrew Ceresney, SECThis latest fine relates to charges that two affiliates of Citigroup defrauded investors in the hedge funds—the ASTA/MAT fund and the Falcon fund—by claiming that they were “safe, low-risk, and suitable for traditional bond investors”. The highly-leveraged funds collapsed during the financial crisis, having raised $3 billion from 4,000 clients.

The $180 million will be paid to investors by Citigroup Global Markets and Citigroup Alternative Investments.

The ASTA/MAT fund bought municipal bonds issued by US state and local government entities and used treasury or LIBOR swaps to hedge interest rates. The Falcon fund was a multi-strategy hedge fund, investing in the ASTA/MAT fund as well as other fixed income strategies including asset-backed securities and collateralized debt obligations.

The SEC said investors were told “repeatedly” by Citigroup Global Markets advisors that the funds were an appropriate low-risk equivalent to bond funds.

Both entities “failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things,” the regulator added. In addition, the SEC said Citigroup Alternative Investments, which managed the funds, failed to prevent advisors and fund managers from “making contradictory and false representations”.

“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.”

Citigroup Global Markets and Citigroup Alternative Investments consented to the SEC’s charges without admitting or denying wilful violations of US regulations.

A spokesperson for Citigroup said the company was “pleased to have resolved this matter.”

The $13.5 million settlement related to a distressed debt fund that collapsed in 2008. Investors sued Citigroup, accusing the bank of falsely stating the quality of the fund.