Citigroup to sell alternative investor services business

Citigroup agreed to pay nearly $180m to settle a US 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.

The SEC said the firms sold securities in two hedge funds from 2002 to 2007, raising almost $3 billion from mostly wealthy investors or institutions.

Moreover, according to the SEC, Citi personnel continued to represent the funds as low risk, well capitalized and relatively liquid, bringing in $110 million in additional capital even the funds began experiencing liquidity problems and margin calls in 2007.

The Falcon fund was a multi-strategy fund that invested in ASTA/MAT and other fixed income strategies, such as CDOs, CLOs, and asset-backed securities. Citigroup noted that financial terms of the transaction are not material to the company.

According to the SEC, Citigroup Inc (NYSE:C)’s two hedge funds were highly leveraged. Before the funds collapsed in 2008, Citigroup had described them as “safe” and “bond substitutes”, the SEC said. The financial service provider’s subsidiaries failed to offer the real risks of the funds. Citi Alternative Investor Services clients can be assured of SS&C’s commitment to continue to serve them with world class people, process and technology. CAI managed both funds.

(CGMI) and Citigroup Alternative Investments LLC (CAI) agreed to “bear all costs” of distributing the $180 million in settlement funds to 4,000 harmed investors. Internally, the private bank rated the funds as having “significant risk to principal”, while not sharing that assessment with the majority of investors and sales people, the SEC said. The SEC blamed the firm for failing to rein in the unnamed manager.