Two Citigroup affiliates will pay almost $180 million to settle charges that they misled clients into investing in two hedge funds that collapsed during the financial crisis.
Citigroup Global Markets and Citigroup Alternative Investments agreed to pay nearly $180 million to harmed investors as part of a settlement with the U.S. Securities and Exchange Commission in an administrative proceeding, according to the SEC.
The affiliates were ordered to pay almost $140 million in disgorgement fees and prejudgment interest of almost $40 million, but did not have to admit guilt or wrongdoing as part of the settlement, the SEC said.
As part of the settlement, both firms agreed to censure and to cease and desist from violating provisions of the Securities Act of 1933 that prohibit fraudulent conduct in the offer and sale of securities.
The SEC alleged that the Citigroup affiliates made misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from about 4,000 investors before collapsing.
The ASTA/MAT fund was a municipal arbitrage fund that purchased municipal bonds and then used a treasury or LIBOR swap to hedge interest rate risks. The Falcon fund was a multistrategy fund that invested in ASTA/MAT and other fixed income strategies.
The Citigroup affiliates failed to disclose the risks of the funds, assuring investors that they were low-risk, well-capitalized investments with adequate liquidity even as the funds began to collapse, according to the SEC complaint. Many of the representations made by Citigroup employees were at odds with disclosures in marketing documents and written materials provided to investors, the SEC said.
The SEC also said it found that the Citigroup affiliates had not implemented policies to prevent advisors from making contradictory or false assertions about financial products.