Citigroup Inc. agreed to pay almost $180 million to settle a U.S. regulator’s allegations that it defrauded wealthy clients of two failed hedge funds by telling them the investments were as safe as low-risk municipal bonds.

Citigroup units made false and misleading statements about the funds, which raised almost $3 billion from 2002 to 2007, the Securities and Exchange Commission said Monday in a statement. Before the funds collapsed in 2008, the bank didn’t tell most clients that an internal rating showed the investments posed significant risks to principal, and Citigroup also failed to disclose that one of the funds was seeking an emergency loan.

“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,” Andrew Ceresney, director of the SEC’s enforcement division, said in the statement.

The funds sought to exploit differences between yields on U.S. government debt and municipal bonds and used borrowed money to amplify those bets. The New York-based bank pushed clients into the funds even into the second half of 2007 when the funds began experiencing margin calls and liquidity problems, according to the SEC.

In settling the matter, Citigroup neither admitted nor denied the SEC’s allegations.

“We are pleased to have resolved this matter,” a company spokeswoman, Danielle Romero-Apsilos, said in an e-mailed statement.

Citigroup pitched the investment as a “better version of a bond” and instructed some clients to sell their unleveraged fixed-income portfolios to buy into the investment, according to the SEC.

Internally, the private bank rated the funds as having “significant risk to principal,” while not sharing that assessment with the majority of investors and salespeople, the SEC said.

In addition to the SEC enforcement action, the U.S. Justice Department is looking into Citigroup Inc.’s dealings with companies linked to Mexican billionaire Carlos Hank Rhon as part of an expanding investigation into the bank’s money-laundering controls.

In a subpoena issued earlier this year, U.S. officials asked Citigroup to provide information on accounts tied to four businesses affiliated with Hank Rhon, according to documents reviewed by Bloomberg. These include two units each of Grupo Financiero Interacciones SA and Grupo Hermes SA, which are controlled by Hank Rhon and his family.

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