Fraud charges against Citigroup affiliates
According to the SEC, Citigroup Global Markets (CGMI) and Citigroup Alternative Investments LLC (CAI) claimed to two hedge funds that they were safe, low-risk, and suitable for traditional bond investors. However, both firms fell apart and eventually collapsed during the financial crisis.
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Based on the investigation of the Commission, the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT und and the Falcon fund. CGMI and CAI collectively raise almost $3 billion in capital from approximately 4,000 investors before collapsing.
According to the SEC, the Citigroup affiliates did not disclose their dismal condition to investors instead both continued to assure investors that they were very low-risk and well-capitalized. In fact even if the firms started collapsing, CAI still accepted almost $110 million in additional investments.
In a statement, SEC Enforcement Division 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.”
Settled administrative order
The SEC order instituting the administrative proceeding indicated that the ASTA/MAT was a municipal arbitrage fund that acquired municipal bonds and under a Treasury or Libor swap to hedge interest rate risks.
The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities.
Financial advisers associated with CGMI exclusively sold the ASTA/MAT fund and Falcon fund to advisory clients of Citigroup Private Bank or Smith Barney. CAI managed both funds.
According to the SEC, the investors in those funds effectively paid advisory fees for two tiers of investment advice. They paid fees to the financial advisers of CGMI and CAI as the fund manager.
The SEC emphasized that ASTA/MAT and Falcon were not low-risk investment similar to a bond alternative.
The Commission said CGMI and CAI failed to control the misrepresentations told to investors. The employees of both firms misleadingly minimized the significant risk of loss related to its investment strategy and use of leverage etc.
CAI failed to adopt and implement policies and procedures to prevent its financial advisers and fund manager from making contradictory and false misrepresentations, according to the SEC.
CGMI and CAI agreed to the SEC order without admitting or denying its findings that both firms violated Sections 17(a) (2) and (3) of the Securities Act of 1933. Both firms agreed to be censured, cease and desist from commit future violations of SEC regulations.
Both firms agreed to bear all costs of distributing the $180 million in settlement funds to harmed investors.