Millennium Global Emerging Credit Fund Ltd. is suing Citigroup (C). The hedge fund’s liquidators claim that the bank undervalued assets when it closed out certain trades during the financial crisis in 2008. They believe that Citigroup did this at rates that failed to reflect the true market value. Millennium sustained nearly $1 billion in losses. Now its liquidators want $53 million in damages.
The positions at issue were linked to the debt of Uganda, Sri Lanka, a brewer from the Dominican Republic. and a sugar company in Zambia. Citibank says the positions were illiquid and difficult to value even when the market was good. While the bank has admitted that it improperly valued certain trades, it maintains that the adjustments are not as great as what the hedge fund is claiming.
Millennium Global Emerging Credit Fund maintains that Citigroup did not use procedures that were “commercially reasonable” when it shut down the positions. The bank offered to pay Millennium about $6.8 million after more than fifty open transactions were closed out, but the fund believes that amount is way too low.
In other hedge fund news, Stone Lion Capital Partners L.P. has suspended redemptions in its credit hedge funds. The move comes in the wake of many investors calling for the return of their money. The Wall Street Journal says that according to sources, Stone Lion is contending with huge losses on distressed investments such as junk bonds, and other special circumstances, including post reorganization equities. A spokesperson for the fund said that the redemption suspensions were the only way to make sure that all investors were treated fairly and equitably.
Stone Lion is not the only hedge fund to suspend redemptions this year. The Carlyle Group LP (CG) announced earlier in the year that it would not be able to give back to investors about two-thirds of the almost $2 billion investors they are requesting. No date has been provided for when repayment would be made.
Also the Third Avenue Focused Credit Fund (TFCVX) said that it would block investors from being able to redeem their money. Third Avenue Management, which oversees the high-yield fund, said this is required because there is not enough cash to satisfy redemption demands and it did not make sense to sell illiquid holdings at fire-sale prices at this time.
The Focused Credit Fund, which previously held approximately $2.5B in securities is now reportedly down to just $788 million. The assets that remain will be placed into a liquidating trust and will be sold off at a pace that will not cause prices to drop too fast.
Third Avenue Focused Credit Fund specialized in high-yield, high-risk bonds. The suspension of reimbursement is another indicator of how junk bonds have started to deteriorate in part in part because energy companies are grappling with debt and the decline in gas and oil prices. The New York Times notes that Third Avenue’s move brings to attention the worry held by some that too many investors have gotten involved in the bond market’s risk areas in an attempt to chase yield. Many of those investors were not sophisticated enough to really appreciate the high risk nature of these investments.
At The SSEK Partners Group our securities lawyers would like to offer you a free case consultation.
Citigroup Sued by Failed Hedge Fund Over 2008 Crisis Trades, Bloomberg, December 9, 2015
Stone Lion Suspends Redemptions in Oldest Funds, Morningstar, December 11, 2015
Junk Bond Fears Are Gathering Steam, Fortune, December 11, 2015