Fund Of Funds Sues Citi Over CSO Fund

Apr 14 2008 | 10:28am ET

A New York fund of hedge funds has sued a Citigroup hedge fund to recoup its investment, accusing Citi’s Corporate Special Opportunities Fund of making hundreds of millions of dollars in unauthorized trades, leading to a double-digit loss last year.

Two Robeco-Sage Capital funds, Triton and River Road, invested $1.25 million in CSO in July, just in time to see the fund wracked by turmoil over a debt deal orchestrated by the fund’s founder, John Pickett. Pickett’s “secret” order for hundreds of millions in ProSiebenSat.1 Media debt forced the fund to boost its leverage after it was awarded a $730 million bundle of loans in an auction; at the time, the firm had just $700 million in assets.

Faced with the growing credit crisis, Pickett, who has since left Citi, sought to cancel the orders, but was overruled by his boss, John Havens. The deal eventually left the fund down 10.9% last year. In January, Citi injected $100 million into CSO to stabilize it. At the same time, the fund suspended redemptions.

According to the Robeco-Sage lawsuit, filed last week in a Manhattan court, Pickett, who is named in the suit, “knowingly misrepresented the financial condition of the CSO fund and its leverage in communications,” and accuses Citi Alternative Investments of “inexcusably” failing to monitor the fund’s risk management.

“The ProSieben trade significantly increased the leverage of the fund from five to seven-and-a-half times the net asset value of the fund, thereby dramatically increasing the downside risk.”

Robeco-Sage, which manages $2.2 billion in assets, is seeking its $1.25 million initial investments, as well as unspecified damages.

The suit, which also names Havens and CAI, is the second such investor lawsuit against Citi in a week. A Florida law firm sued Citi over one of its Falcon hedge funds—which lost more than 40% of its value—seeking class-action status.

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