Citigroup to Pay $180 Million to Settle Charges of Defrauding Fund Investors

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

The Securities and Exchange Commission announced Monday the settlement with Citigroup Alternative Investments, a subsidiary of the bank, and Citigroup Global Markets, an affiliated company.

The investigation says the funds were sold exclusively to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI; both funds were managed by CAI.

According to the SEC, Citigroup made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised almost $3 billion in capital from roughly 4,000 investors before they collapsed. Numerous managers’ verbal statements to investors conflicted with the disclosures in fund marketing materials, according to the agency. The SEC claimed that employees “misleadingly minimized” those risks in selling the funds to investors, as employees continue to sell the fund as it began to crumble.

In a statement, SEC Enforcement Division Director Andrew Ceresney said, “Firms can not insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures”.

“We are pleased to have resolved this matter”, Citigroup spokeswoman Danielle Romero-Apsilos said in an e-mailed statement. The SEC added that even as the funds were collapsing, Citigroup accepted almost $110 million in additional investments. 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.

Even as the funds fell apart and eventually collapsed during the financial crisis, according to the SEC, its managers continued to advertise it as a low-risk, well-capitalized investment. The funds will be paid out to harmed investors.