ASTA/MAT Losses Trigger Investor Lawsuits, Complaints
Hedge funds have become a hotbed of controversy lately, with fund managers facing state and federal investigations, lawsuits and arbitration claims over disclosure issues and charges of misleading investors. Case in point: Citigroup’s ASTA/MAT hedge funds. The failure of ASTA/MAT, which consists of six hedge funds that were sold under the brand names of ASTA and MAT, has resulted in a slew of complaints from investors who say the funds not only were misrepresented, but also that Citigroup raked in millions of dollars in fees and unexplained commissions in the process.
The losses experienced by ASTA/MAT and the lawsuits that have followed are a black eye for Citigroup. According to investors, Citigroup billed MAT and ASTA as safe, conservative investments - alternatives to traditional bond funds that were designed to produce tax-advantages and reliable cash flows. Moreover, investors would be exposed to minimal risks.
In reality, Citigroup took on a risky investing strategy known as municipal bond arbitrage, which involved borrowing approximately $8 for every $1 raised. When the credit and bond markets began to falter in the summer of 2007, and continue their descent in 2008, ASTA/MAT responded accordingly. Ultimately, that mayhem and volatility caused the funds to lose more than 90% of their value.
Despite the financial bleeding, however, Citigroup management continued to push ASTA/MAT to investors. The reason may have had something to do with the millions of dollars in exorbitant fees that Citigroup and its brokers collected.
Citigroup later offered to compensate investors for their losses in ASTA/MAT. The plan, which entailed refunding investors only 45% to 55% of their portfolio’s value, required investors to forego any future litigation against Citigroup for their financial losses in the funds.
Understandably, many investors said a resounding “no” to Citigroup’s settlement offer. Instead, they filed lawsuits to recover their losses, charging Citigroup of misrepresenting ASTA/MAT as a relatively safe, low-volatility bond fund investments when in actuality the funds were highly leveraged and subject to market volatility.
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