Citigroup to pay $180 million on crisis-era hedge fund fraud
Citigroup Inc agreed to pay almost $180 million to settle a US regulator's allegations that it defrauded wealthy clients of two failed hedge funds by telling them the investments were as safe as lowrisk municipal bonds. Citigroup units made false and misleading statements about the funds, which raised almost $3 billion from 2002 to 2007, the Securities and Exchange Commission said in a statement Monday. Before the funds collapsed in 2008, the bank didn't tell most clients that an internal rating showed the investments posed significant risks to principal and Citigroup also failed to disclose that one of the funds was seeking an emer- gency loan. "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," Andrew Ceresney, director of the SEC's enforcement division, said in the statement.
The funds sought to exploit differences between yields on U.S. government debt and municipal bonds and used borrowed money to amplify those bets. The New York-based bank pushed clients into the funds even into the second half of 2007 when the funds began experiencing margin calls and liquidity problems, according to the SEC.
In settling the matter, Citigroup nei- ther admitted nor denied the SEC's allegations. "We are pleased to have resolved this matter," Citigroup spokeswoman Danielle Romero-Apsilos said in an emailed statement.
Citigroup pitched the investment as a "better version of a bond" and instructed some clients to sell their unleveraged fixed-income portfolios in order to buy into the investment, according to the SEC. Internally, the private bank rated the funds as having "significant risk to principal," while not sharing that assessment with the majority of investors and sales people, the SEC said. The names of the funds were the ASTA/MAT municipal bond funds and the Falcon funds.