As part of to the settlements, Citigroup does not admit, nor deny the SEC charges. The proceeds of the agreement will be diverted to investors who were harmed by the funds. Both investments were sold through Citigroup Private Bank as well as through Smith Barney. Citigroup spokesperson Danielle Romero-Apsilos said in an emailed statement, “We are pleased to have resolved this matter,” although offering little elaboration.
The Security and Exchange Commission’s (SEC) Enforcement division is continuing the government’s prosecution of banks and other firms responsible for the financial meltdown that precipitated the greatest economic crisis since the Great Depression. Fresh off of Goldman Sach’s $270 million settlement, and JP Morgan Chase’s $388 million agreement over fraudulent mortgage-backed securities (MBS) investments in the past month, banking giant Citigroup agreed to a $180 million settlement with the SEC involving hedge funds from two of the bank’s subsidiaries, Citigroup Global Markets and Citigroup Alternative Investments. The SEC accused the company’s units of making “false and misleading” statements about the stability of two funds, which secured over $3 billion in investments before collapsing beginning in late 2007. The agency claimed that the units continued to lure investors to spend over $110 million in the “ASTA/MA” fund, focused on arbitrage municipal-bond investments, and the more diversified “Falcon” fund, with directors misleading investors about the funds’ and the market’s declining stability.
The funds were sold to investors from 2002-2008 as being low-risk investments, in fact the Falcon fund was sold under the line that it “walks like a bond, talks like a bond, [has] cashflow like a bond,” calling it a “better version of a bond.” In reality however, internal ratings showed that both investments posed a “significant risk to principal,” including one of the funds seeking an emergency loan, as both ultimately collapsed in 2008. This internal information, however, was not relayed to customers. The ASTA/MA fund was, according to regulators, leveraged between 8 and 12 times by this time. In Monday’s announcement, SEC Enforcement director Andrew Ceresney said, “Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures. 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.”
As part of to the settlements, Citigroup does not admit, nor deny the SEC charges. The proceeds of the agreement will be diverted to investors who were harmed by the funds. Both investments were sold through Citigroup Private Bank as well as through Smith Barney. Citigroup spokesperson Danielle Romero-Apsilos said in an emailed statement, “We are pleased to have resolved this matter,” although offering little elaboration. The manager of the ASTA/MA fund, Reaz Islam, said in a 2012 interview with Bloomberg Business that investors knew of the risks involving the funds. Islam claimed that his fund’s collapse was a result of the economic downturn, adding that he never marketed the fund to investors. Both funds were sold to about 4,000 private clients, including Calloway Golf CEO Ron Beard, who won a $336 FINRA arbitration claim in 2010 over the matter.
Bloomberg Business – Matt Robinson
Barron’s (blog) – Peter Schroeder
Reuters – Sarah N. Lynch
The Hill – Peter Schroeder