Citigroup Structured Notes Bring Gloom To Norway
Less than two years ago, a highly complex and risky investing strategy known as municipal bond arbitrage created a financial tsunami for thousands of investors in two Citigroup hedge funds known as ASTA and MAT. Now, the same strategy has imploded once again - this time the victims include seven Norwegian municipalities and a Norwegian securities brokerage, Terra Securities. The group, which recently filed a lawsuit against Citigroup, lost tens of millions of dollars in complex securities investments they say were marketed and sold as low-risk, conservative products by Citigroup.
According to the complaint, the municipalities say they were duped by Citigroup because the bank failed to warn them that the structured notes in question were highly risky and subject to being cashed out, at a significant loss, if the market price dropped below a certain point.
As in the case of Citigroup’s ASTA/MAT hedge funds, the returns on the investments bought by the Norwegian towns were linked to a municipal bond arbitrage fund created by Citigroup. The fund involved leveraged investments in United States municipal bonds. The investments themselves were highly speculative and included collateralized debt obligations and mortgage-backed securities. In addition, the leverage associated with the fund created added risks - something the Norwegian towns, just like ASTA/MAT investors, were unaware of until it was too late.
By May 2008, nearly all the Norwegian towns’ original investment in the Citigroup notes was wiped out. Meanwhile, Terra Securities found itself forced into bankruptcy.
Court documents in the case accuse Citigroup of selling the notes “in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheets.”
The lawsuit against Citigroup was filed in the United States District Court for the Southern District of New York and also names as defendants Citigroup Global Markets and Citigroup Alternative Investments LLC.
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