MAT/ASTA Cases Reveal the Seamy Side of Wall Street


Ordinarily, the evidence presented in a FINRA arbitration is kept “confidential” and secret from the public. That’s the way the securities industry likes it, because it really does not want the public to see the evidence against it. But in its zeal to try to overturn the largest amount ever awarded to individual investors in a FINRA arbitration, Citigroup inadvertently allowed New York Times columnist Gretchen Morgenson to have a look at the evidence that was presented to the arbitrators in that case. What she found is the subject of her recent article entitled “Secrets of a Sales Machine.”

The background is as follows. In April 2011, the Financial Industry Regulatory Authority (FINRA) issued an award against Citigroup Global Markets, Inc. in the amount of $54.1 million. The arbitration involved Citigroup’s MAT/ASTA municipal arbitrage funds, which Citigroup mismanaged and falsely marketed to traditional fixed income investors as safe and sound alternatives to municipal bonds.

In addition to an amount aimed at compensating the claimant-investors for their losses, the arbitrators ordered Citigroup to pay $17 million in punitive damages and $3 million in attorney’s fees. For the three arbitrators to order Citigroup to pay $20 million more than the actual loss, something about Citigroup’s conduct must have disturbed them greatly, Ms. Morgenson thought.

The evidence that the arbitrators saw would have remained hidden in FINRA files. But Citigroup filed an action in federal court to vacate the award. Both Citigroup and the investors submitted documents from the arbitration for the court to consider. Citigroup asked for those documents to be kept under seal, meaning they were not to be available for public inspection, and they were sealed. But Citigroup’s action was unsuccessful; the court denied Citigroup’s request; the $54 million award stands. Almost all of the documents have now been unsealed by the court.

So Ms. Morgenson took a look and found that the documents show that Citigroup considered MAT/ASTA funds to be among the riskiest of investments, but marketed them to traditional fixed income investors anyway (traditional fixed income investors are risk averse).

Internal Citigroup sales memos falsely describe MAT/ASTA funds as ideal for customers seeking alternatives to traditional fixed income investments. One internal Citigroup documents reads: “Our goal is NOT to target hedge fund clients who are willing to accept an unrestricted risk profile, but larger traditional fixed-income investors who are seeking alternatives and customized solutions without materially altering their risk characteristics.”

The documents also contain emails from angry brokers who had unwittingly sandbagged their best clients based on misinformation about MAT/ASTA funds supplied by Citigroup.

Other documents showed Citigroup executives preparing for a conference call with angry brokers by telling the portfolio manager not to talk about his internal guidelines, which were different from the disclosures contained in the Private Placement Memorandum (offering document) provided to investors:

“You have internal guidelines that are different from what’s in the P.P.M., correct?” one executive asked.

“Yep, we do,” the manager replied.

“Yeah, so we focus on what’s in the docs, rather than, you know … ,” the executive said, trailing off.

When Citigroup concluded it could not stonewall complaints from brokers and investors, it offered to repurchase the investments, but at a steep discount, and only if the client signed an agreement waiving all rights to claim against Citigroup. Perhaps in an effort to corral complaining clients, Citigroup made sure its brokers knew that a decision by a client to accept Citi’s offer would not show up as a “black mark” on the brokers Form U-5, but if a customer did not sign and instead filed a claim, that would show up.

Ms. Morgenson quoted from an email written by a broker that described MAT/ASTA as a defective and ruinous product that was mismanaged by Citigroup, and stated: “If one drives their car into another, they are responsible; they have no option but to take responsibility for their actions.” Ms. Morgenson concluded that this was a good metaphor for the entire credit meltdown–“except for the taking responsibility part,” she said.

Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.