Securities Fraud and Mismanagement

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August 24, 2015, Citigroup paid $180 million to the SEC to settle allegations that Smith Barney and Citigroup improperly sold high risk hedge funds known as MAT, ASTA and Falcon.  Investors should contact a private attorney if they have suffered such losses.  For a free consultation please call 1-866-817-0201.

The fraudulent actions alleged, and with Citi ultimately settled for $180 million, concern material misstatements and omissions made by Cit between 2002 and 2007 in the offer and sale of securities in two now-defunct hedge funds—the ASTA and MAT funds (“ASTA/MAT”) and the Falcon Strategies funds (“Falcon”).  The ASTA/MAT and Falcon funds were recommended and sold by two groups of individuals, the “financial advisers” of Smith Barney and the “private bankers” of Citigroup Private Bank (together, the “financial advisers”), to their advisory clients. The financial advisers were associated with respondent CGMI (Citigroup Global Markets). Both funds were managed by CAI, which acted through its employees, including an employee who had a primary role in creating the funds and serving as the funds’ manager during the relevant time period (the “fund manager”). Respondents raised approximately $2.898 billion from approximately 4,000 investors in ASTA/MAT and Falcon. In 2008, both funds collapsed resulting in billions of dollars in losses. From 2002 through 2008 (the “relevant period”), financial advisers and the fund manager misrepresented the funds’ risks and performance to advisory clients, who were told that the investments were “safe,” “secure,” “low-risk,” “bond substitutes” and suitable for traditional bond investors, despite statements in marketing documents that the funds should not be viewed as a bond substitute.

As alleged in the SEC Complaint, while the risk of principal loss was disclosed in written materials provided to clients, certain financial advisers and the fund manager orally minimized the significant risk of loss resulting from, among other things, significant high-risk aspects of the investments such as the funds’ investment strategy and use of leverage (the borrowing of money to make investments). The biggest risk told investors was ASTA/MAT adoption of a flat income tax by the federal government.  Financial advisers encouraged many of their advisory clients to sell portions of their bond portfolios, their safe holdings, in order to invest in the risky funds. In late 2007, financial advisers and the fund manager continued to offer and sell Falcon as a safe, low-risk investment, even though both funds—the Falcon fund was 20 percent invested in the ASTA/MAT fund—began experiencing increased margin calls and liquidity problems in the second half of 2007 that continued until the funds collapsed.  Moreover, the fund manager was involved in virtually all fund-related communications with the financial advisers and investors. The fund manager and the fund manager’s staff were responsible for drafting and reviewing offering materials for the funds, crafting sales pitches to investors, training CAI sales personnel (who, in turn, were responsible for marketing the funds to the financial advisers), drafting quarterly investor reports, disclosing interim fund performance.

The fund manager and other employees at CAI had significant influence over the information relating to the funds without review or oversight, including information relating to the funds’ risks and performance. CAI failed to ensure that the fund manager’s communications with investors and financial advisers concerning the ASTA/MAT and Falcon funds were accurate and not misleading.