Finra orders Citigroup to pay $51M to muni fund investors

Apr 12, 2011 @ 1:37 pm

Citigroup Inc., the third-biggest U.S. bank, was ordered to pay more than $51 million to a group of investors in its MAT and ASTA municipal-bond hedge funds, which regulators began examining more than two years ago.

The ruling by arbitrators at the Financial Industry Regulatory Authority, which oversees U.S. brokerages, includes $17 million in punitive damages, according to a copy of the panel's decision on Finra's website. It's the third-largest arbitration award by Finra and predecessor NASD since 1988, according to Securities Arbitration Commentator Inc., a Maplewood, New Jersey-based legal publishing and research firm.

“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, said in an e-mailed statement.

The U.S. Securities and Exchange Commission has questioned former Citigroup brokers as part of a probe into whether the bank misled investors about risks associated with certain debt funds, people familiar with the matter said last year. Citigroup disclosed the inquiry into the MAT and ASTA funds in August 2008, after the funds tumbled to values ranging from 10 cents to 60 cents on the dollar amid souring credit markets early that year.

Arbitrators didn't explain the reasoning behind their ruling. They ordered Citigroup to pay $21.7 million to patent attorney Gerald Hosier, $8.5 million to Brush Creek Capital LLC, which is owned by Hosier's family, and $3.9 million to venture capitalist Jerry Murdock Jr., the ruling shows. Among their claims, plaintiffs had accused the bank of breaching a fiduciary duty, contract violation, fraud, breaking Finra rules and supervisory failures.

‘Very Significant Award'

“It's a very significant award,” said Phil Aidikoff, a partner at Aidikoff, Uhl & Bakhtiari, a Beverly Hills, California-based law firm that helped represent the claimants. “The panels are clearly recognizing that even though all of these customers were wealthy sophisticated people, they've been lied to about this particular investment.”

The funds used short-term borrowings to fund purchases of long-term municipal bonds, said Craig McCann of the Securities Litigation & Consulting Group, a Virginia consulting firm, who worked as an expert witness for the plaintiffs.

“It was sold as having just a little bit more risk than an unlevered municipal bond portfolio,” said McCann. “It wasn't just a little bit more risky, it was a lot more risky.”

Citigroup said in a regulatory filing last month that “several” investors in funds including MAT and ASTA had filed lawsuits and arbitration claims against the bank, and that many of the disputes are already resolved. The SEC is examining the marketing, management and accounting treatment of the funds, the company said, adding that it is fully cooperating.

The bank, run by Chief Executive Officer Vikram Pandit, 54, since December 2007, must also pay the claimants' $3 million legal fees, according to the ruling.

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