Regulators have ordered Citigroup to make whole hedge fund investors who placed money in a fixed-income municipal arbitrage product—the MAT 3 Municipal Arbitrage Fund—which was sold by the banking giant.
The Financial Industry Regulatory Authority has ordered the bank to pay more than $550,000 to the investors, saying the bank misled both its own brokers as well as its investors regarding the risks posed by the product, according to the Wall Street Journal.
"We are disappointed and disagree with this decision as it is inconsistent with other panels, which have dismissed similar claims," a spokesman for Citigroup told the WSJ.
Citigroup created the municipal arbitrage product in 2006 and marketed it as having the volatility of the Lehman Brothers Aggregate Bond Index. But according to lawyers for the hedge funds—which were not named—the product was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.