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Category Archives: Citigroup

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.

Citigroup Settles Fannie Mae, Freddie Mac Claims Tied to Mortgage Bond Losses

Late last month, Citigroup agreed to settle a lawsuit by the Federal Housing Finance Agency that accused the nation’s third-largest bank of misleading investors and peddling more than $3.5 billion in securities backed by defective residential mortgages to Fannie Mae and Freddie Mac over a 20-month period starting in September 2005.

Financial terms of the settlement were not disclosed.

The FHFA, in its role as conservator for Fannie Mae and Freddie Mac, sued Citigroup and 17 other financial institutions in 2011. The FHFA charged Citigroup with misstating facts about the quality of the underlying mortgage loans and the practices used to originate them.

Meanwhile, the FHFA remains active in settlement discussions with other banks that are subjects of similar lawsuits.

Citigroup Found Liable in FINRA Claim Involving Rochester Municipal Fund

A New York arbitration panel of the Financial Industry Regulatory Authority (FINRA) has ordered Citigroup Global Markets, Inc. to pay compensatory damages of more than $1.4 million to an investor who suffered losses tied to a municipal bond fund that was marketed as safe and secure but in reality contained risky derivative securities.

The investor purchased Citi’s Rochester Municipal Fund in 2007 after Citigroup recommended it as a safe alternative to her municipal bond fund investments and one that would pay slightly more interest. Instead, the Rochester Municipal Fund consisted mainly of toxic and speculative derivative securities whose value is dependent on the performance of underlying assets.

“Through the issuance of this arbitration award, our client not only received a substantial portion of the losses that she sustained as a result of her investment in the Rochester Municipal Fund, but the arbitrators also further held Citigroup liable for 9% of statutory interest on her principal loss, as well,” says Maddox Hargett & Caruso’s Steven B. Caruso, who served as counsel for the investor.

The case shines an important spotlight on the questionable sales practices of brokers and the impact those practices can have on investors regardless of their wealth or financial sophistication.

“Wealthy investors in particular are often asked to defend their investment choices by brokerage lawyers in arbitration cases, because of the false assumption that they must have a deeper understanding of what they are buying than average investors, said Caruso in a Sept. 12 article by Reuters. “Wall Street often mistakenly equates wealth with financial know-how.”

In addition to this FINRA arbitration award, Maddox Hargett & Caruso, P.C. has served as co-counsel in numerous other FINRA arbitration proceedings involving Citigroup’s ASTA-MAT municipal arbitrage products. To date, investors in those cases have been awarded damages of more than $60 million.

ASTA/MAT Saga Continues

The Citigroup manager behind failed fixed-income alternative funds known as ASTA/MAT apparently is moving on with his life after the funds collapsed and left thousands of investors financially ruined.

As reported March 13 by Bloomberg, Reaz Islam ran the ASTA/MAT funds, which lost some 90% of their value in 2008. Since then, Citigroup has been the focus of a string of securities investigations, as well as lawsuits and arbitration claims filed by investors who contend the funds were marketed and sold to them as a safe, less risky and more profitable alternative than other fixed-income and municipal investments.

In reality, the ASTA/MAT funds were highly leveraged, borrowing approximately $10 for every $1 raised. Meanwhile, the managers of ASTA/MAT continued to invest in some of the most risky and speculative investment strategies possible. By February 2008, the funds had lost more than 90% of their value.

On April 11, 2011, an arbitration panel of the Financial Industry Regulatory Authority (FINRA) ordered Citigroup to pay a record $54 million to investors who suffered losses in ASTA/MAT and several other purported fixed income-related products. Investors in the case were jointly represented at the hearing by Steven B. Caruso of the New York City office of Maddox, Hargett & Caruso, P.C. and Philip M. Aidikoff & Ryan K. Bakhtiari of the Beverly Hills, California, office of Aidikoff, Uhl & Bakhtiari.

The ruling included an assessment against Citigroup of $17 million in punitive damages, following allegations that Citigroup misled investors about the risks of the funds. The award is one of the largest arbitration awards ever recovered on behalf of individual investors, according to FINRA.

 Meanwhile, Islam, who gave an interview to Bloomberg following a four-year silence on the ASTA/MAT matter, is now a managing partner with LR Global Partners LP. According to its corporate Web site, LR Global is a New York-based investment firm with operations in Bangladesh, Singapore,Vietnam and Sri Lanka.

As for Citigroup, the fallout from ASTA/MAT isn’t over. Arbitration claims for more than 69 households are still pending before FINRA for investors who are jointly represented by Maddox Hargett & Caruso, P.C. and Aidikoff, Uhl & Bakhtiari.

Mat/ASTA Case Brings $54 Million Award For Investors

A highly leveraged municipal arbitrage fund known as Mat/ASTA has come back to haunt its creator, Citigroup Global Markets. On April 11, a Denver, Colorado-based Financial Industry Regulatory Authority (FINRA) arbitration panel awarded more than $54 million to two clients represented by the laws firms of Aidikoff, Uhl & Bakhtiari and Maddox, Hargett & Caruso.

The award includes punitive damages of $17 million and $3 million in attorney fees. The arbitration panel also assessed the entire cost of the arbitration hearing against Citigroup Global Markets, ordering the firm to pay $33,500 in expert witness fees and $13,168 in court reporter costs.

“This award demonstrates that even the most sophisticated investors were misled by Citi in the marketing and sale of the Mat and ASTA leveraged municipal arbitrage product,” said Steven B. Caruso of Maddox, Hargett & Caruso.

“The fact that the arbitrators also awarded expert witness costs, court reporter costs and all FINRA forum fees is both unusual and important,” Caruso added.

The Mat/ASTA fund was sold through Smith Barney and Citigroup Private Bank to high net worth clients between 2002 and 2007. According to investors, the returns and risks of the funds were represented as “slightly greater” than a typical municipal-bond portfolio.

In reality, the Mat/ASTA funds were highly leveraged, borrowing approximately $8 for every $1 raised.

“Citi misrepresented the known risks of Mat/ASTA to retail investors such as the claimants in this case,” said Dr. Craig McCann of Securities Litigation and Consulting Group. McCann served as an expert witness for the claimants.

Maddox, Hargett & Caruso continues to investigate FINRA arbitration claims on behalf of investors who suffered financial losses in leveraged municipal arbitrage investments, including Mat/ASTA.

Judge Not Ready To Sign Off On Citigroup/SEC Settlement

When Citigroup eked a $75 million settlement deal in July with the Securities and Exchange Commission (SEC) over claims it misled investors by failing to disclose $40 billion in risky mortgage-related holdings, many people thought Citigroup got off far too easy. Now, it appears a federal judge feels the same way.

U.S. Judge Ellen Huvelle said earlier this week that she wouldn’t approve the $75 million settlement and wants more information from the bank.

Citigroup first stated in 2007 that it had significantly reduced its exposure to mortgage securities by 45%, to $13 billion. That wasn’t the case, of course. In reality, Citigroup made a $40 billion understatement of its mortgage-related exposure.

The SEC then accused Citigroup of committing negligent – not intentional – fraud. No fraud allegations were filed against any executives at Citigroup, however. Instead, the SEC cited two men, former Citigroup Chief Financial Officer Gary Crittenden and former investor-relations head Arthur Tildesley, of engaging in “disclosure violations.”

Crittenden paid a $100,000 fine and Tildesley $80,000.

Like many people, Judge Huvelle has some questions for Citigroup, not the least of which is how the SEC settled upon the $75 million fine in the first place. Why didn’t federal regulators accuse Citigroup of intentional fraud? And, more important, why were only two individuals cited by the SEC? Surely there were others behind the obvious misdeeds.

Citigroup has until the end of September to get back to the judge with its answers.

Meanwhile, Citigroup shareholders are paying the price for Citigroup’s actions. Citigroup stock is down more than 90%.

Reverse Convertibles Can Spell Financial Disaster For Investors

Reverse convertibles, also known as reverse exchangeable securities, are complex structured investment products linked to the performance of an unrelated asset. The asset can be a single stock or a basket of stocks, an index or some other asset.

When investors purchase a reverse convertible, they are getting a yield-enhanced bond. They do not own, and do not get to participate in any upside appreciation of the underlying asset. Instead, in exchange for higher coupon payments during the life of the note, investors give the issuer a “put option” on the underlying asset. In other words, investors are betting that the value of the underlying asset will remain stable or go up, while the issuer is betting that the price will fall.

In the best case scenario, if the value of the underlying asset stays above the knock-in level or even rises, an investor can receive a high coupon for the life of the investment and the return of the full principal in cash. In the worst case, if the value of the underlying asset drops below the knock-in level, the issuer can pay back the principal in the form of the depreciated asset – which means investors can wind up losing some, or even all, of their principal.

That’s exactly what happened to Lawrence Batlan, an 85-year-old retired radiologist. Batlan, who suffered a loss of almost 20%, says his Citigroup broker talked him into shifting out of preferred stocks in 2007 and buying $400,000 of reverse convertibles, which promised higher interest and safety.

As reported June 16, 2009, by the Wall Street Journal, Batlan’s reverse convertibles were linked to four well-known stocks and paid between 6.25% and 13% at a time when 10-year Treasurys were yielding around 5% yearly. Then the financial crisis appeared, and the share prices of the four underlying stocks fell below the 20% knock-in threshold. Batlan suddenly found himself the owner of stocks worth $75,000 less than he initially invested.

“I had no idea this could happen,” said Batlan in the article. “I have no desire to own Yahoo stock or the others.” Batlan has since filed a complaint with the Financial Industry Regulation Authority (FINRA) in an attempt to recover the $75,000 back from Citigroup.

Harvey Goodfriend, 77, has a similar story. The retired mechanical engineer says he was told by his broker that there was no risk in reverse convertibles. Goodfriend soon discovered otherwise. He says he lost 36% of the almost $250,000 that his Stifel Nicolaus & Co. broker placed into reverse convertibles two years ago.

If you have suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Regulators Take Aim At Reverse Convertibles

Complex investments known as reverse convertibles face growing scrutiny from regulators for their hidden risks, lack of transparency and, in some instances, because of the manner in which they are represented to investors by certain brokers.

As reported in a June 24 story by Bloomberg, brokers for JPMorgan Chase & Co., Royal Bank of Scotland Group Plc, and Barclays Plc have been charging fees on some structured notes that equal or exceed the securities’ highest possible yield.

“It seems inconceivable that the commission could be more than the potential return to clients,” said Durraj Tase in the Bloomberg article. Tase, who is an adviser with First Liberties Financial in New York, added: “If you are paying more fees than your potential return, as an adviser, I would not be able to suggest that note.”

On June 15, RBS gave brokers a 2.75% commission to sell a three-month reverse-convertible note with a 2.56% potential yield, according to the Bloomberg story. In May, JPMorgan charged 5.25% in fees and commissions on a three-month Citigroup-linked note that paid 5% interest, and Barclays offered brokers a 2% commission on a security paying 2% interest.

In February 2010, the Financial Industry Regulatory Authority (FINRA) issued an alert to investors on the risks associated with reverse convertibles. Among things, FINRA warned that reverse convertibles expose investors not only to risks traditionally associated with bonds and other fixed income products – such as the risk of issuer default and inflation risk – but also to the additional risks of the unrelated assets, which are often stocks.

In the case of JPMorgan’s reverse convertibles, investors are exposed to losses if Citigroup declines by more than 20%.

If you have suffered losses in Reverse Convertibles, please contact our securities fraud team. We can evaluate your situation to determine if you have a claim.

Investors Win MAT Three Municipal Arbitrage Fund Complaint

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.

Preferred Stock Losses: Freddie Mac Series Z

Investors of Freddie Mac Preferred Stock, Series Z are unlikely to forget the date of Sept. 6, 2008. It was on that day the U.S. government made the unprecedented move to place both Freddie Mac and Fannie Mae under the conservatorship of the Federal Housing Finance Agency (FHFA).  In doing so, investors holding preferred shares of Freddie Mac Series Z saw the value of their investment plummet overnight.

The initial offering of Freddie Mac Preferred Stock, Series Z occurred in late 2007 when the mortgage giant – whose financial health already was in jeopardy – found itself severely undercapitalized. Underwriters of the Series Z offering included Goldman Sachs, J.P. Morgan and Citigroup Global Markets, as well as others.

As it turns out, the offering circulars associated with Freddie Mac Preferred Stock Series Z failed to alert investors to a number of possible risks that the preferred shares posed. Among the missing information: Freddie Mac was extremely undercapitalized. It had significant exposure to an undetermined amount of mortgage-related losses. The company also lacked proper risk-management procedures. Most important, insolvency was a real possibility in Freddie Mac’s future.

It’s now believed that many of the brokerage firms that acted as underwriters of the Freddie Mac Preferred Stock Series Z offering knowingly kept this information from investors. Not only did they allegedly fail to disclose the true risks associated with the offering itself but they also may have kept the facts about Freddie Mac’s financial condition under wraps, as well.

Freddie Mac’s Series Z offering initially was issued at a price of $25.55 in November 2007. In September 2008, the preferred stock had declined 95%, trading at $1.25 per share.

If you experienced investment losses in Freddie Mac’s Preferred Stock, Series Z or another preferred stock, please contact us. A member of our securities fraud team will evaluate your situation to determine if you have a viable claim for recovery.


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