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Monthly Archives: August 2015

Office of Compliance Inspections and Examinations Released Their Latest Risk Alert

The below link is to the OCIE Risk Alert released this week on August 24th.

National Exam Program Risk Alert

Citigroup Subject of Massive SEC Settlement Stemming from Fraudulent ASTA/MAT and Falcon Hedge Fund Products – Firm to Pay Nearly $180 Million to Defrauded Investors

On August 17, 2015, The Securities and Exchange Commission announced that two Citigroup affiliates have agreed to pay nearly $180 million to settle charges that they defrauded investors in the ASTA/MAT and Falcon hedge funds by claiming they were safe, low-risk, and suitable for traditional bond investors. The funds later crumbled and eventually collapsed during the financial crisis.

The SEC investigation found that the Citigroup affiliates made false and misleading representations to investors in the ASTA/MAT fund and the Falcon fund, which collectively raised nearly $3 billion in capital from approximately 4,000 investors before collapsing. In talking with investors, they did not disclose the very real risks of the funds. Even as the funds began to collapse and Citigroup accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.

“Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “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.”

According to the SEC’s order instituting the settled administrative proceeding:

*  Neither Falcon nor ASTA/MAT were low-risk investments, akin to a bond alternative, as investors were repeatedly told.

*  Citigroup failed to control the misrepresentations made to investors as their employees misleadingly minimized the significant risk of loss resulting from the funds’ investment strategy and use of leverage among other things.

*  Citigroup failed to adopt and implement policies and procedures that prevented the financial advisers and fund manager from making contradictory and false representations.

The plan of distribution for investors is expected to be presented to the SEC before the end of 2015.

Pimco Facing Possible SEC Lawsuit

After receiving a Wells notice from the SEC, about some Pimco securities that contain bundled mortgages, Pimco released a statement disclosing the possibility of facing a federal lawsuit over how it valued positions held by one of its enormous bond funds.

Between Feb. 29th and June 30th 2012, Pimco may have misrepresented the value of certain securities purchased by its Total Return Active Exchange-Traded Fund (BOND).

The Total Return Active ETF has more than $2.5 billion net assets, according to Pimco, and invests primarily in low-risk debt securities. The fund has a year-to-date return of about 2%.

“The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken,” Pimco said in a statement.

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