The Securities and Exchange Commission says two Citigroup affiliates have agreed to pay almost $180 million to settle charges that they defrauded investors in two hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors.
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“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”, said Andrew Ceresney, director for the SEC’s enforcement division.
In talking with investors, the Citigroup affiliates “did not disclose the very real risks of the funds”.
“The fund manager and the fund managers’ staff played a significant role in drafting and disseminating information regarding the funds to investors and financial advisers without sufficient review or oversight to ensure that the information given to investors was accurate”, the SEC said.
The SEC said that even as the funds were collapsing, the units still accepted $110 million in additional investments and investors were not informed about the “dire” financial conditions. The firms also were censured, bringing the possibility of a stiffer sanction if the alleged violation is repeated.
‘The funds were not bond substitutes, and an investment in the funds carried significantly greater risk than a bond investment, ‘ the SEC said.
A spokesman for Citigroup responded that the company is “pleased to have resolved this matter”.
Last year Citigroup and U.S. regulators reached a deal that included restrictions to prevent Citigroup from selling investments in hedge funds and private-equity funds to wealthy clients.
The SEC’s investigation has been conducted by Olivia Zach, Kerri Palen, David Stoelting, and Celeste Chase of the New York Regional Office, and supervised by Sanjay Wadhwa. The funds will be paid out to harmed investors.
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In addition, while the risk of principal loss was disclosed in written materials provided to clients, certain financial advisers and the fund manager allegedly minimized the significant risk of loss resulting from, among other things, the funds’ investment strategy and use of leverage.
