Citigroup Will Pay $180 Million to Settle SEC Case

The Securities and Exchange Commission (“SEC”) announced that Citigroup Global Markets, Inc. (“CGMI”) and Citigroup Alternative Investments LLC (“CAI”) have agreed to settle charges concerning two now-defunct hedge funds – the ASTA/MAT fund and the Falcon fund. According to the Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 15(b)(4) of the Securities Exchange Act of 1934, and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), CGMI and CAI will pay $180 million in disgorgement and prejudgment interest.

According to the Order, between 2002 and 2007, financial advisers at CGMI raised approximately $2.898 billion for the ASTA/MAT and Falcon funds from roughly 4,000 advisory clients. Both hedge funds were managed by CAI.

ASTA/MAT was a municipal arbitrage fund that purchased municipal bonds and used either a Treasury or LIBOR swap to hedge interest rate risk, according to the SEC. An arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The Order states that ASTA/MAT employed an 8-12 times leverage.

The Falcon fund was a multi-strategy fund that invested in fixed income strategies like CDOs, CLOs, and asset-backed securities, as well as, invested in the ASTA/MAT fund. The SEC claims that the Falcon fund employed 5-6 times leverage.

In the SEC proceeding, it was alleged that financial advisers orally misrepresented to investors that Falcon and ASTA/MAT were “safe”, “low-risk” investments, when in reality, the funds had a significant risk to principal exacerbated by the amount of leverage employed by the funds.

According to the Order, the funds began experiencing increased margin calls and liquidity problems in the fall of 2007 which continued until the funds collapsed in 2008.

The Order reflects that CGMI and CAI will pay disgorgement of $139.9 million and prejudgment interest of $39.6 million. In addition, CGMI and CAI are responsible for the costs of distributing the settlement funds to harmed investors. Both firms were also censured and ordered to cease-and-desist from future securities law violations.