Hedge Fund Sues Citi, Wachovia Over Credit-Default Swaps

Mar 4 2008 | 2:09pm ET

A Florida hedge fund is suing Citigroup and Wachovia, claiming the investment banks “suckered” it into losing more than $18 million on credit default swaps.

According to the complaints from Del Ray Beach-based VCG Special Opportunities Master Fund, Citigroup downplayed the risk involved in the derivatives, in addition to charging “far in excess of what Citibank actually required.” It is suing the Wall Street giant for beach of contract and unjust enrichment.

In a separate complaint, VCG accused Wachovia of knowing “it would simply extract additional collateral under the pretext of the writedowns” to the initial contract.

VCG filed its suit against Wachovia on Nov. 28. Citigroup was sued on Feb. 14. The $58 million hedge fund is seeking repayment of losses and punitive damages.

Stephen Mintz, a lawyer for VCG, characterized the banks’ actions as squeezing a smaller hedge fund to minimize their own losses.

Both banks call VCG’s complaints “without merit,” and Wachovia filed a countersuit on Feb. 15, alleging breach of contract and seeking $1 million plus interest.

The lawsuits were first reported in The Wall Street Journal.

According to VCG—formerly the CDO Plus Master Fund—Citi bought $10 million in protection against a collateralized debt obligation. When the credit crisis struck, the bank allegedly sought increasing amounts of collateral, eventually totaling almost the entire $10 million notional of the swap, VCG said.

As for Wachovia, VCG alleges that the bank demanded the hedge fund, which had put up an initial $750,000, boost its collateral almost fourteen-fold on credit protection. When it refused the final request for an additional $1.49 million in collateral, VCG says Wachovia seized the $9 million it had already put up.


In Depth

Q&A: Brevan Howard’s Charlotte Valeur Talks Strategy

Sep 18 2014 | 11:18am ET

Charlotte Valeur chairs the board of Brevan Howard Credit Catalysts, an LSE listed...

Lifestyle

Hedgies Rock Out For Children's Charity

Sep 15 2014 | 8:40am ET

It's that time of year again—when hedgies trade in their spreadsheets for guitars...

Guest Contributor

Volkered: How Financial Sector Reforms are Creating Opportunities for Hedge Funds

Sep 16 2014 | 11:28am ET

New regulations have dramatically curtailed proprietary trading activity in investment...

 

Editor's Note

    Get A Sneak Peak Of The Alpha Pages

    Aug 25 2014 | 11:21am ET

    As many of you know, FINalternatives was recently acquired by the owners of Futures magazine, a firm called The Alpha Pages LLC. Today marks the soft-launch of a new sister site for both publications. As its name suggests, The Alpha Pages will cover all types of alternative investments, going far beyond the more well-known ones such as hedge funds and private equity. Read more…

 

Futures Magazine

September 2014 Cover

The London Whale: Rogue risk management

Credit default swaps brought down the London Whale and cost JPMorgan $6.2 billion. Here is how it happened.

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.