Citigroup Alternative Investments LLC is a subsidiary of Citigroup Global Markets Inc., and between 2002 and 2008, they raised approximately $2.898 billion from approximately 4,000 investors into two now-defunct hedge funds—the ASTA and MAT funds (“ASTA/MAT”) and the Falcon Strategies funds (“Falcon”).
These funds were recommended and sold by two groups of individuals, the “financial advisers” of Smith Barney and the “private bankers” of Citigroup Private Bank to their advisory clients.
Financial advisers and the fund manager represented to investors that Falcon was a “safe,” “low-risk” investment, akin to a “bond substitute” or “bond alternative” that had the same risk profile as a municipal bond investment but with a slightly higher return. Internal sales pitches stated that Falcon “walks like a bond, talks like a bond, [has] cashflow like a bond” and described Falcon as a “better version of a bond.” Consistent with that marketing theme, Falcon was benchmarked against the Lehman Aggregate Bond Index, which is used to evaluate the performance of bond portfolios. Some investors were encouraged to sell their unleveraged bond portfolios in order to purchase shares in the Falcon fund.
In addition, while the risk of principal loss was disclosed in written materials provided to clients, certain financial advisers and the fund manager minimized the significant risk of loss resulting from, among other things, the funds’ investment strategy and use of leverage.
Some financial advisers and investors were told that the hypothetical ASTA/MAT portfolio had been back-tested over a five year period (1996 to 2001), and that, over such period, the largest decline in the portfolio was approximately 7 percent. That statement was false because the back-testing actually showed that the portfolio, when fluctuations in bond prices over the entire time period were analyzed, declined by up to 32 percent in value.
Both Funds Collapsed Resulting in Billions in Losses
Of the $2.8 billion of these hedge funds sold over the six year period, it is estimated that Citigroup Global Markets and its related entities reaped at least $280 million in commissions, underwriting fees and management fees.
As a result of their consent order with the SEC, it appears that they will have to give almost half of this money back.
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