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Citigroup pays $180 million to settle hedge fund fraud case

August 17, 2015

NEW YORK – U.S. securities regulators ordered two Citigroup affiliates Monday to pay $180 million to settle charges that they defrauded investors by falsely claiming a pair of hedge funds were low-risk.

Citigroup collected nearly $3 billion from 4,000 investors by claiming the ASTA/MAT fund and the Falcon fund were low-risk investments akin to investing in government bonds, the U.S. Securities and Exchange Commission said.

In 2008, both funds collapsed during the financial crisis.

“The funds were not bond substitutes, and an investment in the funds carried significantly greater risk than a bond investment,” the SEC said.

Both funds used “significant amounts of leverage” and were classified in an internal Citigroup rating system as having “significant risk to principal.”

“That rating, however, was not shared with the majority of investors and financial advisors,” the SEC said.

The SEC criticized Citigroup for poorly overseeing fund management staff to ensure communications were “accurate and not misleading.”

The order also faulted fund employees for dishonest statements about the funds’ financial condition when they came under strain in 2007.

“Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster,” said Andrew Ceresney, director for the SEC’s enforcement division.

Citigroup said through a spokesman that the bank is “pleased to have resolved this matter.”

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