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Home > Cases > Citigroup > Citigroup ASTA/MAT Investors Emerge Victorious In Recent FINRA Claims

Citigroup ASTA/MAT Investors Emerge Victorious In Recent FINRA Claims

Two years ago, investors sought financial refuge in the supposed safety of the municipal bond market and, in particular, in a series of funds called ASTA/MAT. After all, the funds' creator, Citigroup, had sold them on the fact that they were putting their money in relatively low-risk investments.

It turns out the investments were far from low risk. As reported July 27 by the Wall Street Journal, ASTA/MAT and other products like it were created by issuing tax-exempt short-term debt to buy longer-term municipal bonds that had higher tax-exempt yields. Investors found the funds appealing because they offered yields higher than municipal bonds by a few percentage points.

What investors didn't know was that the funds entailed excessive amounts of leverage and the use of derivatives such as interest-rate swaps. This leverage, in turn, amplified losses when financial markets became volatile.

And when that happened, investors in such deals lost big.

The Securities and Exchange Commission (SEC) currently is looking into whether fund sponsors like Citigroup understated the risk of the products. According to the Wall Street Journal article, federal prosecutors in the Eastern District of New York also are examining the disclosure statements of the funds in question.

Meanwhile, investors have filed legal claims against various brokerage firms, accusing them of concealing the risks of the funds and misrepresenting the risk levels.

As evidenced by recent arbitration rulings, it would appear the Financial Industry Regulatory Authority (FINRA) agrees. Earlier this month, an investor arbitration panel awarded a California family $2.1 million, the full amount of its losses on a $3 million investment in a fund sponsored by First Republic Securities Co., formerly owned by Merrill Lynch & Co.

In May and June, three groups of investors in funds sold by Citigroup - the largest sponsor of such funds - won a total of $2.1 million in separate arbitration proceedings.

Investors' claims of product misrepresentation were evident during the arbitration involving First Republic Securities. As reported in the Wall Street Journal, the FINRA hearing panel criticized the “glibness” of the funds' managers and defense witnesses for their awareness of the fund's “upsides,” such as higher yield and higher fees, without “any realistic advance recognition [of] any specific risks or patterns of risk.”

In the Citigroup case involving its ASTA/MAT funds, company marketing materials compared the funds' risk to other bond “alternatives” like high-yield or emerging-market bond. But another page titled “risk vs. reward” indicated that the strategy was three times as risky as a bond-market index and even riskier than a stock-market index.

One series of Citigroup funds raised $1.9 billion from investors between 2002 and 2007, invested in an estimated $15 billion in bonds and lost between 70% and 97% of their asset value by the end of February 2008, according to company documents. Citigroup stepped in to salvage the funds with more than $650 million of its own capital.

One investor who lost big in Citigroup's ASTA/MAT is Bob Selan. According to the Wall Street Journal, Selan invested $1 million in a Citigroup fund in 2006 through a broker at Smith Barney. Selan says the product was presented to him as “a safe alternative” to bonds.

Selan quickly discovered otherwise, however. When the mortgage crisis unfolded, municipal-bond prices plummeted amid forced sales, and leveraged funds had to come up with additional collateral. Many funds were forced to liquidate.

Selan eventually lost more than 50% of his investment. In May, however, a FINRA arbitration panel awarded him $550,504.96 plus interest.

Craig McCann, an expert witness who has testified for investors in a dozen related cases, estimates that Citigroup will have to pay out tens of millions in losses from such claims.

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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