Citigroup Affiliates to Pay $180M To Resolve Hedge Fund Fraud Charges

Citigroup Global Markets Inc. (CGMI) and Citigroup Alternative Investments LLC (CAI) have consented to pay close to $180M to resolve Securities and Exchange Commission charges accusing them of bilking about 4,000 investors in the Falcon fund and the ASTA/MAT fund. The two hedge funds went on to fail during the financial crisis. The settlement money will go to investors who were hurt in the purported fraud.

According to an SEC probe, the Citigroup (C) affiliates made misleading and false misrepresentations to investors. The two hedge funds, managed by Citigroup Alternative Investments, were highly leveraged and sold only to advisory clients of Smith Barney and Citigroup Private Bank. They were sold by financial advisers associated with Citigroup Global Markets. Together, the hedge funds raised close to $3 billion in capital from investors before they went on to fail.

In its order, the SEC said that the ASTA/MAT fund bought municipal bonds and hedged interest rates by employing a Treasury or LIBOR swap. It described the Falcon fund as multi-strategy, invested in fixed-income strategies (including collateralized loan obligations, collateralized debt obligations, asset-backed securities) as well as in the other hedge fund.

Investors claim that the two affiliates misrepresented the hedge funds as low-risk, safe, and suitable for bond investors looking for traditional investments, when, in fact, the funds were high risk. They contend that even as the funds started failing, CAI accepted close to $110 million in investments.

Investors in both funds paid fees for investment advice from CAI and the DGMI advisers. The regulator said that that CAI should have put into place procedures and policies that could have stopped the fund manager and advisers from making representations that were false and contradictory.

The Citigroup affiliates also are accused of failing to disclose the funds’ financial woes while allegedly continuing to tell investors that the investments were well-capitalized, low risk, and had sufficient liquidity. The SEC said that a lot of the purported misrepresentations were in conflict with disclosures made in marketing documents and written materials that investors received.

CMGI and CAI will cover all costs involved with distributing the $180M to investors.

Read the SEC Order (PDF)