Citigroup settles with investors over collapse of hedge funds
Citigroup has agreed to pay $180m to investors to settle claims that the bank made false and misleading statements regarding two hedge funds, which collectively raised nearly $3bn from about 4,000 investors before they collapsed.&nbsp;The SEC, which announced the settlement, also said that the bank continued to take on investment in the funds even while they were collapsing.&nbsp;
But in 2007 and early 2008, the fund’s managers failed to inform the thousands of investors in the funds about a severe shortage of liquidity and margin calls from lenders providing the leverage to the funds. On several occasions, the funds were forced to sell billions of dollars of assets to meet margin calls, but did not disclose these sales to investors, the agency said in its order.

The fund managers, according to the regulator, also misled investors into believing that potential losses from the funds would be minimal when the bank’s own analysis showed they could reach 48 percent under certain circumstances.

Still, the hedge funds were able to raise additional money from investors up until the very end.

In the fall of 2007, one of the hedge funds, called Falcon Strategies, sold as much as $110 million in additional shares in the funds to investors. Yet only a few months later, in January 2008, the liquidity problem had become so dire that the manager of the Falcon fund had drawn up “liquidation scenarios.” Even Citigroup, the parent, wouldn’t extend emergency liquidity to its own hedge funds.

“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,” Andrew Ceresney, director of the S.E.C.’s enforcement division, said in a statement.

Citigroup agreed to pay the $180 million to harmed investors without admitting any wrongdoing.