Cit­i­group to pay $180 mil­lion on cri­sis-era hedge fund fraud

The Pak Banker - - COMPANIES/BOSS -

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.

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