Hedge funds marketed by Citigroup as “ideal investments for conservative retirees” have now lost 75% or more of their value. Citigroup’s Smith Barney brokerage unit raised hundreds of millions of dollars for those hedge funds ? called Falcon and ASTA/MAT ? from retail clients who were told that the fixed income funds were safe places to stash money. Now Citigroup is facing a huge outcry from injured customers and their brokers.
After weeks of intense internal debate, Citigroup is offering to cover some of the losses. This offer is tantamount to an admission that the hedge funds were misrepresented to investors.
Falcon invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments; ASTA/MAT emphasized municipal bonds. Each consisted of different funds that were launched periodically. Last year, as it geared up to launch new Falcon and ASTA/MAT funds, Citigroup encouraged the brokers at Smith Barney and Citigroup’s private bankers to pitch the funds to their best customers. Of course, they told none of these customers that one reason for the push was that Falcon had declined more than 10% and Citigroup wanted to stabilize it with new cash.
By September 2007, the new Falcon fund had raised $71 million and the new ASTA/MAT fund had raised $800 million. Both funds were heavily sold to retail investors. The brokers and fund managers assured prospective investors that the new hedge funds were low-risk. Falcon was pitched as being likely to post losses of no more than 5% a year in a worst-case scenario.
By March 31, 2008, the new Falcon fund was worth just 25% of its initial value; the new ASTA/MAT fund had declined to less than 10% of its original value by February 29, 2008. Behind the scenes, Sallie Krawcheck, the head of global wealth-management at Citigroup, waged a “battle royale” to get Citibank to help investors ? who were among Smith Barney’s’ best clients ? recover at least some losses.
Under a compromise, Citigroup’s wealth-management group will spend $250 million to allow Falcon investors to sell their positions without absorbing the full fund losses, if they agree to forfeit all legal claims against the funds. A similar offer will be made to some ASTA/MAT investors.
Citigroup is offering these investors a complex arrangement that is designed to enable it to settle these claims on the cheap. Under Citigroup’s convoluted proposal, the customer would receive approximately 25 cents for each dollar invested plus the promise of a vague upside on a limited liability company in exchange for a general release of all claims against Citigroup. Since the losses amount to approximately 80 cents on the dollar, the settlement proposal compensates the investor for only 28% of the losses. Even some Smith Barney brokers are complaining that Citigroup seems to be compensating customers “just enough so they don’t sue us.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their subprime investment problems. For further information, please contact us.