Two Citigroup affiliates—Citigroup Global Markets and Citigroup Alternative Investments—today agreed to pay nearly $180 million to the Securities and Exchange Commission to settle charges that they defrauded investors in two 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.
According to the SEC, 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 real risks of the funds.
“Even as the funds began to collapse and CAI 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,” the SEC said. “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.”
CGMI and CAI consented to the SEC order without admitting or denying the findings that both firms willfully violated Sections 17(a)(2) and (3) of the Securities Act, that GCMI willfully violated Section 206(2) of the Investment Advisers Act; and that CAI willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-7 and 206(4)-8. Both firms agreed to be censured and must cease and desist from committing future violations of these provisions.