US securities regulators ordered two Citigroup affiliates today to pay US$180 million (RM739.1 million) to settle charges that they defrauded investors by falsely claiming a pair of hedge funds were low-risk.
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The ASTA/MAT fund was a municipal arbitrage fund that bought municipal bonds and hedged risks with Treasury or Libor swaps, while the Falcon fund invested in a number of products, including complex instruments like collateralized debt obligations (CDOs).
Even as the funds began to collapse and CAI accepted almost $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity.
In settling the matter, Citigroup neither admitted nor denied the SEC’s allegations.
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 nearly $3 billion in capital from approximately 4,000 investors before collapsing. Both firms agreed to be censured, cease and desist from commit future violations of SEC regulations.
The funds were highly leveraged, according to the SEC, and neither was a “low-risk investment akin to a bond alternative as investors were repeatedly told”. Before the funds collapsed in 2008, Citigroup had described them as “safe” and “bond substitutes”, the SEC said.
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“Firms can not insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures”, said Andrew Ceresney, director of the SEC’s enforcement division. Citigroup has said previously that the attorneys general of Massachusetts and New York also have investigated the management and marketing of the funds.
