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Portfolio > Alternative Investments > Hedge Funds

Citigroup to Pay $180M for Defrauding Hedge Fund Investors

By Melanie Waddell

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Two Citigroup affiliates agreed Monday to pay $180 million to the Securities and Exchange Commission to settle charges they defrauded investors in two hedge funds that collapsed during the financial crisis in 2008.

Without admitting or denying the findings, Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) agreed to “bear all costs” of distributing the $180 million in settlement funds to 4,000 harmed investors.

The SEC alleged that both Citigroup units claimed the hedge funds were safe, low-risk and suitable for “traditional bond investors,” but failed to disclose the “very real risks” in the funds, which eventually crumbled and then collapsed during the financial crisis.

An SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund, a municipal arbitrage fund, and the Falcon fund, a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies — which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. 

(Related: Don Trone Blasts DOL Fiduciary Plan: Still Wouldn’t Stop Madoff)

The funds, both highly leveraged, were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisors associated with CGMI. Both funds were managed by CAI. 

The SEC states that neither fund “was a low-risk investment akin to a bond alternative as investors were repeatedly told.”

In talking with investors, the Citigroup affiliates “did not disclose the very real risks of the funds. Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity,” the SEC states.

Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

The order states that CAI failed to adopt and implement policies and procedures that prevented the financial advisors and fund manager from making contradictory and false representations.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” Andrew Ceresney, director of the SEC’s Enforcement Division, said in a statement. “Advisors at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

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