Failed hedge funds cost Citi $180M

August 18 08:59 2015

Citigroup put an ugly chapter of the financial crisis behind it Monday with a deal to fork over $180 million to settle charges that it misled investors about the risks of two hedge funds that collapsed during the mortgage meltdown. The Securities and Exchange Commission said two Citigroup affiliates agreed to pay the fine to settle charges that they defrauded investors of the ASTA/MAT fund and the Falcon fund by claiming they were were “safe,” “low-risk” and suitable for traditional bond investors.AP CITIGROUP CHARGES F A FILE USA PA

The funds, which were invested in risky asset-backed securities, collectively raised close to $3 billion from approximately 4,000 investors before collapsing, the SEC said. Citigroup’s financial advisers even encouraged some clients to sell portions of their bond portfolios to invest in the hedge funds, which they described as “bond substitutes,” the SEC said. Such statements Citigroup employees were at odds with the company’s own marketing documents, however, which made clear that the funds should not be viewed as a safe, bond substitute, the SEC said.

Even as the hedge funds began crumbling in 2007, the bank accepted $110 million in additional investments, the SEC said. The two Citigroup affiliates — Citigroup Global Markets, which was formerly Salomon Smith Barney, and Citigroup Alternative Investments — did not properly disclose the condition of the funds at this time, the SEC said. Instead, some Citigroup employees continued to assure investors that they were invested in low-risk investments with adequate liquidity, the SEC said.

By January 2008, Falcon’s fund manager had drawn up potential “liquidation scenarios” for the fund. Yet the fund’s manager and some financial advisers continued to tell investors that Falcon had “adequate liquidity” and that the fund was “well capitalized,” the regulator said. They failed to disclose the fund’s requests for liquidity support, which were denied by CAI and Citigroup, or the sale of over $8.4 billion in fund assets to meet growing margin calls, the SEC said.