A Los Angeles Financial Industry Regulatory Authority (FINRA) arbitration panel has awarded investors more than $550,000 in damages for their complaint involving a fixed-income municipal arbitrage investment known as MAT Three.

Created and launched by Citigroup Global Markets and sold through Smith Barney in February 2006, MAT Three was represented as a fixed-income alternative product – an investment that supposedly had similar volatility to that of the Lehman Brothers Aggregate Bond Index. In reality, the highly leveraged fund exposed investors to 100% or more loss of principal and was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.

When MAT Three imploded in February 2008, investors suffered devastating losses.

“Despite widespread evidence that Citigroup misrepresented MAT’s risk level to its own brokers, who then passed the misleading information on to their clients, Citigroup elected to employ the ‘blame the customer’ defense,”’ stated Steven B. Caruso of Maddox Hargett & Caruso, P.C. “The FINRA arbitration panel obviously rejected this defense.”

Maddox Hargett & Caruso, P.C. and Aidikoff, Uhl & Bakhtiar provided legal representation to the investors in the case.

The award represents a return of 100% of the investors’ losses, according to Caruso, who says that the win is the second significant investor win in a MAT case for his firm’s clients in recent weeks.

Speaking at the Barclays Capital Global Financial Services Conference on Sept. 15, Citigroup CEO Vikram Pandit for the first time announced publicly that he anticipates the bank to divest its entire 49% stake in Morgan Stanley Smith Barney LLC.

New York-based Citigroup has been among the country’s hardest-hit financial institutions from the credit crisis. Over the past 18 months, the struggling bank – which Richard Shelby, R-Ala., referred to in March as a “problem child” – slashed its assets by $500 billion. As a result of ongoing liquidity concerns, Citigroup has borrowed about $45 billion in taxpayer bail-out money through the Troubled Asset Relief Program.

Citi also continues to face mounting legal and financial woes over its alternative investments, including the ASTA/MAT hedge funds. Currently, the funds are at the center of numerous lawsuits and arbitration claims with the Financial Industry Regulatory Authority (FINRA) by investors who allege Citigroup misrepresented the products as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal – no more than 5% a year in the worst-case scenario, according to the company.

Instead, ASTA/MAT plummeted in value last summer because of turmoil in the financial markets and housing markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and that ASTA/MAT would rebound once the markets stabilized.

That didn’t happen. As it turns out, the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible.