Risk & Compliance

Citigroup Settles Fund Fraud Case for $180M

The SEC alleged two Citigroup affiliates duped investors by claiming that hedge funds were safe, low-risk, and "bond substitutes."
Matthew HellerAugust 17, 2015

Two Citigroup affiliates have agreed to pay nearly $180 million to settle charges they misled investors about the risks of two hedge funds that ultimately collapsed during the financial crisis.

Employees of Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments (CAI) claimed the funds were safe, low-risk, and suitable for traditional bond investors even though the funds had begun experiencing increased margin calls and liquidity problems in the second half of 2007, the U.S. Securities and Exchange Commission alleged in an administrative order.

The ASTA/MAT and Falcon funds collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. The SEC noted that many of the misleading claims made by Citigroup employees were at odds with disclosures in marketing documents and written materials provided to investors.

“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 Monday in a news release. “Advisers 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.”

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

From 2002 through 2008, the SEC said, financial advisers and the fund manager told advisory clients that the investments were “safe,” “low-risk,” “bond substitutes” and suitable for traditional bond investors, even though marketing documents stated that the funds should not be viewed as a bond substitute.

In addition, while the risk of principal loss was disclosed in written materials provided to clients, certain financial advisers and the fund manager allegedly minimized the significant risk of loss resulting from, among other things, the funds’ investment strategy and use of leverage.

“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 said.

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