SEC Files Another Settled Market Crisis Case

The market crisis may have ended years ago, but not the SEC’s supply of cases from that time period. The agency filed a settled action in which those soliciting sophisticated investors misrepresented the risks of two funds, contrary to the warnings in the materials. In the Matter of Citigroup Alternative Investments LLC, Adm. Proc. File No. 3-16757 (August 17, 2015).

Respondent Citigroup Alternative is a subsidiary of Citigroup Inc. It was the investment manager for the ASTA/MAT and Falcon funds. Respondent Citigroup Global Markets Inc., is an affiliate of Citigroup Inc. It recommended and sold share of ASTA/MAT, a leveraged municipal arbitrage fund, and Falcon fund, a multi-strategy fund invested in fixed income strategies and asset-backed securities which was also leveraged, to investors associated with it.

From September 2002 through early 2007 Respondents offered and sold about $1.9 billion of investments in ASTA/MAT to about 2,700 investors and advisory clients of Citigroup Global. From late 2004 through October 2007 Respondents sold about $936 million of investments in Falcon to about 1,300 investors and advisory clients of Citigroup Global. Each fund was managed per disclosed investment strategies and was leveraged. Shares in the two funds were not generally sold to retail investors. Rather, they were limited to qualified purchasers.

Those marketing the shares claimed that Falcon was safe, low-risk and could be considered a bond substitute. Similarly, ASTA/MAT was represented to be safe and low risk despite the disclosures in its offering materials. Those claims were not accurate, according to the Order. The funds used significant amounts of leverage which increased the risk of a margin call. Back testing for ASTA/MAT demonstrated there was more risk than investors were told. Thus the risk of loss for that fund, which also accounted for about 20% of Falcon’s investments, was higher than those selling the interests were told.

In August 2007 Falcon experienced margin calls. The fund manager sold about $2 billion of fund assets. An urgent request for a contingency liquidity plan in the amount of $200 million – essentially a loan from Citigroup Alternative or Citigroup Inc. — was denied. Investors were not informed about its financial condition. Misrepresentations continued to be made about its performance. Indeed, in September and October 2007 about $110 million was raised from new investors who were not told the actual financial condition of the fund. From November 2007 through March 2008 Falcon continued to experience severe liquidity shortage.

During the same period those marketing ASTA/MAT orally misrepresented its condition and ability to survive a declining market. Investors were told that the biggest risk to the fund was the institution of a flat tax. Those in charge of the sales groups, who played a part in drafting and disseminating information regarding the funds, did not implement policies and procedures to prevent the misrepresentations to the investors. The Order alleges violations of Securities Act Sections 17(a)(2) and (3) and Advisers Act Sections 206(2) and 206(4).

To resolve the action Respondents consented to the entry of cease and desist orders based on the Sections cited in the Order as well as censures. In addition they will pay disgorgement of $139,950,239 along with prejudgment interest.

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