An SEC investigation into whether two Citigroup affiliates representations to investors in two hedge funds that raised approximately $2.9 billion in capital has been settled with an agreement to pay $180 million.
The material misstatements and omissions at issue in this SEC order were made between 2002 and 2007. The hedge funds, known as the (1) ASTA and Mat funds and (2) Falcon Strategies funds, raised money through Smith Barney and Citigroup Private Bank from about 4,000 investors. The funds collapsed in 2008 during the financial crisis.
Employees of the affiliates allegedly said they were safe, low-risk and a suitable alternative for bond investors. In the press release about the settlement, Director of the Enforcement Division Andrew Ceresney explicitly rejected the notion that fine print could be used to insulate the companies from liability for the misrepresentations. An internal risk rating system at one of the affiliates in fact called them a “significant risk to principal.”
The affiliates also reportedly assured investors that they were well-capitalized with adequate liquidity while they were collapsing. In 2007, one of the funds experienced margin calls and financial advisers continued to sell investors shares and recommend the funds despite the declining market conditions and liquidity issues.
The companies consented to an SEC order without admitting or denying findings of various violations including the Investment Advisers Act and the Securities Act of 1933. The precise charges varied by company.