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Home > Cases > Citigroup > Citigroup's Crashing Falcon Strategies Fund Causes Huge Losses for Wachovia and Fifth Third

Citigroup's Crashing Falcon Strategies Fund Causes Huge Losses for Wachovia and Fifth Third

When the value of Citigroup's Falcon Strategies hedge fund plummeted over 75 percent, banking giants Wachovia Corp. and Fifth Third suffered like many investors—lost hundreds of millions of dollars, thanks to controversial bank-owned life insurance (BOLI) programs. Fifth Third now seeks to recoup its losses through legal action.

Wachovia sank more than $1 billion into Citigroup's Falcon fund, while Fifth Third invested $612 million, according to a May 20 article by David Enrich in The Wall Street Journal.

The investments in Falcon were part of questionable BOLI programs, which some critics dispute as simple tax shelters. In the BOLI plans, banks buy life insurance policies on employees and collect tax-free income when they die. Many banks now stash premiums in investment vehicles so they can also record quarterly profits and losses tax-free.

When Citigroup's Falcon fund collapsed, the banks lost big. In the first quarter of this year, Wachovia lost $315 million on its BOLI investments, due in large part to Falcon, The Wall Street Journal article said. At Fifth Third, BOLI-related losses totaled a painful $329 million over the last two quarters.

As a result, Fifth Third filed a lawsuit last month against Clark Consulting Inc. and Transamerica Life Insurance Co., both units of Dutch insurer Aegon NV, claiming that the firms “utterly failed to properly manage and monitor” premiums invested in Citigroup's Falcon fund. Interestingly, the lawsuit does not name Citigroup as a defendant.

Aegon's spokeswoman, Cindy Nodorft, contends that Fifth Third “was free to choose from a number of investment alternatives that they were familiar with” and the “terms of the policy were adhered to.”

In the meantime, Citigroup scrambles to minimize headaches, handing out $250 million to let retail investors exit from their positions in Falcon without suffering the fund's full losses. Will it be enough to appease investors angry over Citigroup's ongoing struggles with risk controls?

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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