Citigroup Affiliates to Pay $180M to Settle Hedge Fund Allegations

Aug 17 2015 | 1:12pm ET

Citigroup has agreed to pay nearly $180 million to settle SEC allegations that it made false and misleading representations regarding two debt hedge funds that raised an aggregate $3 billion from more than 4,000 investors between 2002 and 2008 before imploding during the financial crisis. 

Two Citi affiliates, Citigroup Global Markets Inc. and Citigroup Alternative Investments LLC, consented to the payment without admitting or denying the charges, and agreed to be censured as part of the settlement. 

The SEC said the two funds, named the ASTA/MAT fund and the Falcon fund, were sold to investors through Citigroup Private Bank and Smith Barney as low-risk vehicles that invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments suitable for traditional bond investors. 

In reality, the two vehicles were highly leveraged, according the SEC, and far riskier than Citi admitted. 

Moreover, according to the SEC, Citi personnel continued to represent the funds as low risk, well capitalized and relatively liquid, bringing in $110 million in additional capital even the funds began experiencing liquidity problems and margin calls in 2007. 

Some of these representations were even at odds with the disclosures contained in marketing material related to the funds, according to the SEC, and neither were the low-risk bond alternatives investors were sold.

“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, in a press release.

Litigation regarding the funds began almost immediately after their collapse in mid-2008. In a statement, Citigroup said the company was pleased to have resolved the matter. 

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