Citigroup has agreed to pay $13.5 million to settle a lawsuit that claimed the bank had misled investors to keep their money in a hedge fund during the financial crisis.
According to court documents, the plaintiffs accused the bank and its affiliate Citigroup Alternative Investments of falsely stating the quality of a corporate special opportunities hedge fund as “fundamentally sound.”
The plaintiffs sued the firm on fraud and aiding and abetting fraud “purchaser” claims.
The fund—mainly allocated to distressed debt—collapsed a little more than a year after Citi made a €558 million ($621 million) investment in a syndicated loan for a large German broadcaster in June 2007.
The plaintiffs added this initial investment had already exceeded the fund’s entire net asset value and “violated at least one of the fund’s internal investment restrictions.”
In a December 2007 letter, Citi encouraged investors to stay in the fund despite already losing $62.4 million with the investment.
Six weeks later, the firm was forced to suspend redemptions and bolster the fund by adding $159 million of its own assets to the fund.
Despite these efforts, the fund was liquidated in November 2008, court documents said, and investors lost a bulk of their investments.
The settlement comes after nearly three years of “extensive litigation and prolonged, arms-length settlement negotiations,” according to the document.
Citi’s spokesperson told CIO the firm was pleased to resolve the matter.
The $13.5 million settlement covers 35% of estimated damages ($39.2 million), more than triple the median percentage in similarly sized securities class actions, the document said.
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