Archive for the “Citigroup” Category

For the past year, ASTA/MAT investors have been biding time as they wait for their arbitration claims against Citigroup to be heard. The focus of investors’ legal claims centers on a group of six hedge funds sold under the brand names of ASTA and MAT. Investors say Citigroup misrepresented the funds as safe, relatively low-risk investments.

Instead, the funds produced staggering financial losses for investors because of a highly risky investing strategy known as municipal bond arbitrage. When the credit and bond markets began to become unglued in the summer of 2007, ASTA/MAT plummeted in value.

As reported in a July 27 Wall Street Journal article, one series of Citigroup funds lost between 70% and 97% of their asset value by the end of February 2008. The funds were later given life support when Citigroup stepped in with more than $650 million of its own capital.

Recently, however, some ASTA/MAT investors and investors in similar funds have begun to see a light at the end of the tunnel. This month, a Financial Industry Regulatory Authority (FINRA) arbitration panel awarded a California family $2.1 million - the full amount of their losses on a $3 million investment in a municipal bond fund investment 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.

More victories may be the future. Philip Aidikoff of Aidikoff, Uhl & Bakhtiari says lawyers for investors have three dozen clients who had combined losses of more than $100 million on the Citigroup funds. 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.

Investors in a municipal arbitrage hedge fund known as MAT Five have been awarded more than $1.7 million by a Los Angeles Financial Industry Regulatory Authority (FINRA) arbitration panel.

The MAT Five fund specialized in municipal arbitrage - highly leveraged financial activities in which fund managers hedge tax-free municipal bonds against riskier taxable corporate bonds. When Citigroup first launched MAT Five, investors thought they were investing in a relatively low-risk, conservative fixed-income alternative that had the volatility of Lehman Brothers Aggregate Bond Index.

In reality, MAT Five was a risky investment. According to evidence presented to the FINRA arbitration panel, the fund exposed investors to a 100% more loss of principal, was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.

“When confronted with evidence that Citigroup misrepresented MAT’s risk level to its brokers, who then passed the misleading information on to their clients, a high ranking Citigroup official testified that it was “unwise” for customers of the firm to have relied on what their brokers had told them about an investment that had been recommended by the firm,” said Steven B. Caruso, a partner of Maddox Hargett & Caruso P.C., one of the several law firms that provided legal counsel to the plaintiffs.

In addition to the $1.7 million award in favor of investors, the arbitration also assessed the entire cost of the hearing against Citigroup Global Markets.

The investors’ legal team includes the law firms of Maddox Hargett & Caruso, P.C. of New York, New York and Indianapolis, Indiana; Aidikoff Uhl & Bakhtiari, of Beverly Hills, California; Page Perry, LLC, of Atlanta, Georgia; and David P. Meyer & Associates Co., L.P.A., of Columbus, Ohio.

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.

Institutional and individual investors failed to emerge victorious in two recent auction rate securities arbitration claims against Citi Smith Barney and Raymond James Financial. As reported Nov. 9 by Investment News, a Miami FINRA (Financial Industry Regulatory Authority) panel denied claims brought by the Banco Industrial De Venezuela against Smith Barney in October. That same month, a Texas FINRA panel denied an investor’s claim involving more than $10 million worth of auction rate securities purchased from a Raymond James broker in 2006 and 2007.

For more than a year, thousands of retail and institutional investors have struggled to find a solution to their auction rate securities (ARS) woes. The problems began in February 2008 when the once $330 billion ARS market abruptly came to a standstill, leaving investors who thought their money was as liquid as cash in dire financial straits.

Following the collapse of the auction rate securities market, a number of state and federal investigations ensued. The result of those investigations led to allegations that many Wall Street firms aggressively marketed and sold auction rate securities as liquid cash investments, while failing to tell investors about the considerable risks associated with the instruments and the fact that the auctions for the securities could fail.

A number of Wall Street brokerage firms have since announced ARS buy back programs, agreeing to repurchase their clients’ auction-rate investments. In total, more than 20 firms - including Citigroup, Wachovia, Morgan Stanley, UBS, Goldman Sachs, Bank of America, TD Ameritrade, Fidelity Investments and Merrill Lynch, have agreed to repurchase $61 billion of the instruments from some customers.

In the recent case involving Raymond James Financial, it’s worth noting FINRA’s explanation of its decision (FINRA No. 08-03386) in the case. The panel’s findings state that Raymond James broker Rick Woolfolk “was poorly trained with respect to the ARS product. At various times, he described the investment as a unit trust, short-term paper or short-term stuff.”

The panel also noted that it was unclear whether the investor who purchased the auction-rate securities from Raymond James Financial was aware of the risks of failed auctions when he directed the initial purchase of the instruments. It was only after the purchase that Raymond James disclosed the risks of the products, according to the panel’s findings.

Despite denying all relief to the claimant, the FINRA panel said it remained “troubled by the inadequate training and other firm-related deficiencies” on the part of Raymond James Financial. Forum costs totaling $7,000 were assessed to Raymond James.

Meanwhile, investors continue to fight their ARS battles by filing individual arbitration claims against the brokerages that sold them investments in auction rate securities. As reported in a Nov. 8 article in the New York Times, almost 500 auction-rate securities claims have been filed by investors with FINRA following the collapse of the ARS market. A total of 253 are pending; 242 have been closed.

Seventeen claims have gone to a final hearing. Of those, investors won in four cases; a $400 million award was handed down by a panel in one matter. But 146 of the 242 closed cases were settled by the parties involved in the dispute, the New York Times reports. Settlement terms aren’t made public, but such deals typically involve refunding much, if not all, of investors’ money, the New York Times article states, citing lawyers who handle the cases.

Moreover, some settlements involve “consequential damages” - additional money awarded to cover investors’ costs of the arbitration proceedings or investment opportunities they missed because they were unable to access to their money.

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.

A retired securities attorney is suing Nuveen Investments, Merrill Lynch, Citigroup, Deutsche Bank, and Mesirow Financial for the $2 million in losses that he and his wife suffered as a result of investing in auction-rate securities. According to the lawsuit, Joan and Howard Kastel allege that they are victims of a “fraudulent scheme” in which markets for the instruments were intentionally manipulated. 

The lawsuit says that in August and September 2007 Mesirow Financial purchased 88 shares of auction-rate preferred securities for the Kastels’ account. The shares, which cost $25,000 per share, were issued by three Nuveen North Carolina funds through Nuveen Investments LLC, the Chicago-based broker-dealer, at auctions conducted by Deutsche Bank. As reported in an Aug. 26 article by Investment News, Merrill Lynch and Citigroup participated in the auction, as well.

When the $330 billion auction-rate securities market suddenly froze up in February 2008, the Kastels’ were unable to access their cash. According to their lawsuit, they are now stuck with 85 shares of Nuveen North Carolina ARPS, which pay “unconscionably inadequate” interest that “does not fairly compensate” the couple.

The Kastels are suing Mesirow, Nuveen and Merrill Lynch for approximately $6 million. In addition, they are seeking compensation for emotional distress. 

Prior to the collapse of the ARS market, thousands of retail and institutional investors purchased auction-rate securities on the premise they were cash equivalents. When the market crashed last year, however, they discovered that their liquid investments had become essentially worthless. On the heels of lawsuits by state and federal regulators, some Wall Street banks and investment firms eventually agreed to buy back billions of dollars worth of the securities from retail investors, while other firms have continued to resist such measures.

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.

The auction rate securities mess is heating up for Charles Schwab. New York Attorney General Andrew Cuomo is expected to soon file a lawsuit against San Francisco-based Schwab over issues related to the company’s marketing and sales of auction rate securities (ARS) to retail and institutional investors. Cuomo announced last month that he intended to take legal action against the brokerage unless it agreed to an ARS settlement and a buy-program to repurchase the auction rate securities from clients.

Since no deal has materialized, Cuomo will likely proceed with a civil fraud lawsuit against Schwab, according to an Aug. 17 story in the Wall Street Journal. As part of the lawsuit, Cuomo will present transcripts of recorded conversations between Schwab brokers and its clients, revealing how the auction rate securities were misrepresented by Schwab.

In one exchange between a Schwab broker and a client, the customer says: “You know, I’m not trying to make a ton of money. I just want to play it safe.” The broker responds: “The hardest part of this auction is getting into it. That is the tough part. Getting out is easy as just selling.”

Auction rate securities are considered long-term debt instruments that act as a short-term investment because of the manner in which they are resold. Interest rates on the products are reset at weekly or monthly auctions. When the market for auction rate securities collapsed in February 2008, thousands of retail and institutional investors became stuck with an illiquid investment.

Faced with potential lawsuits from state and federal securities regulators, a number of Wall Street firms that underwrote auction rate securities, including Citigroup, Merrill Lynch, UBS and J.P. Morgan Chase, agreed to buy back more than $60 billion of the instruments from customers.

Several retail brokerages, however, opted not to participate in the buy-back programs. Specifically, some “distributors” of auction rate securities continue to leave their clients with no solution to the financial losses they’ve suffered because of ARS investments.

When the market for auction-rate securities collapsed last year, Schwab’s clients were stuck with $789 million of the securities.

Schwab’s hold-out to avoid any type of settlement with regulators comes on the heels of recent agreements by two retail brokers to buy back millions of dollars in auction rate securities from clients. In July, Fidelity Investments and TD Ameritrade both agreed to repurchase $756 million of the securities from customers.

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.

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.

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.

In David and Goliath fashion, seven small Norwegian villages brought to the brink of bankruptcy are taking on banking giant Citigroup, suing the New York-based company for fraud and misrepresentation of sales tied to high-risk mortgage backed securities. The municipalities, together with the bankruptcy estate of the Norwegian brokerage firm that set up the investments, Terra Securities, are seeking more than $200 million in compensation, after suffering losses on $115 million worth of complex structured financial products known as fund-linked notes, or FLNs.

According to the complaint, Citigroup represented the FLNs as safe, conservative investments. In reality, however, the products were neither. Returns on the notes were linked to the U.S. housing market. When the bottom fell out of that market beginning in the summer of 2007, the value of the FLNs plummeted, causing the municipalities to lose tens of millions of dollars. By May 2008, substantially all of their original investment had evaporated and Terra Securities was in bankruptcy. 

The lawsuit also contends Citigroup’s marketing materials contained misleading statistics that concealed from both Terra Securities and the municipalities the inherent risk factors associated with the fund-linked notes. Moreover, the group says Citigroup directed Terra Securities to present the deceptive materials to the municipalities. 

“Clearly, as credit markets began to deteriorate, Citigroup sold the FLNs to Terra and the municipalities in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheet,” the lawsuit says.

The seven towns involved in the lawsuit lost some $90 million as a result of their investment with Citigroup, while Terra’s shareholders lost their entire stake. 

Today, several of the Norwegian towns that invested in the FLNs are facing severe cutbacks of public services, including schooling and care for the elderly.

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.

Publicly referred to on Capitol Hill as “the problem child of banking,” Citigroup now faces a whole new set of issues. The latest trouble for the bank, which has received some $45 billion in taxpayer bail-out money to date, concerns huge losses in its private investments division and, specifically, two funds overseen by former Citigroup chief financial officer Michael Froman.

According to a July 20 story in the Wall Street Journal, the funds in question include the Citi Infrastructure Investors fund, a private-equity fund that amassed $3.4 billion to invest in various infrastructure projects before clients pulled the plug, exercising their right to restrict new investments because of previously failed deals. Adding to the fund’s problems were resignations by several key Citigroup managers, one of whom included Froman. Another Citigroup private-equity fund was shelved altogether after failing to attract clients. 

In January 2009, the Obama administration welcomed the former Citigroup manager of those troubled funds - Froman - into its fold as deputy assistant to the president and deputy national security adviser for international economic affairs. Given the depth of financial problems in the two funds formerly managed by Froman, the addition of the Citigroup executive to the president’s inner circle was viewed by many as controversial. 

Over the past year, Citigroup has been immersed in legal and financial issues related to its alternative investments. Two such products, the ASTA/MAT hedge funds, currently are the focus of numerous lawsuits and arbitration claims by investors who say Citigroup misrepresented the funds as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal - no more than 5% a year in the worst-case scenario.

Instead, ASTA/MAT plummeted in value last summer because of turmoil in the financial markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and to expect ASTA/MAT to rebound once the market returned to normal.

That didn’t happen, of course. Investors later learned the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible, including subprime mortgages and derivatives.

Now Citigroup has new issues to deal with: massive losses in its infrastructure fund and the ongoing compensation controversy surrounding the fund’s former manager, Froman. According to the Wall Street Journal, as Froman prepared to begin his White House post in late January, he was due and later received more than $4 million in compensation from Citigroup.

Froman also had a big financial stake in the Citi Infrastructure Investors fund, which he had received as part of his pay package. When Froman wanted to cash out, he suggested Citigroup pay him at least $10 million for his stake in the fund, according to the Wall Street Journal.

Keep in mind, Froman was part of Citigroup’s Alternative Investment division - the same division that accumulated hundreds of millions of dollars in losses last year because of high-risk and esoteric investments. As the financial losses multiplied, a number of Citigroup executives in that division - including Froman - bailed, with many collecting seven-figure salaries and bonuses as their parting “gift.”

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.

Despite the fact it has numerous lawsuits and arbitration claims pending over a group of failed hedge funds known as ASTA/MAT - not to mention having received some $45 billion of federal govern ment bailout money - Citigroup plans to raise the base salaries of its investment bankers and traders by as much as 50%. 

As reported June 24 by Bloomberg, Citigroup isn’t the only financial services firm instituting big salary increases for some of their top executives. Morgan Stanley and UBS plan to do so, as well. 

Over the past year, Citigroup been rocked by investor complaints and lawsuits connected to the failure of ASTA/MAT, a group of six hedge funds sold under the brand names of ASTA and MAT. Investors contend Citigroup misrepresented the funds as safe, conservative investments, a desirable alternative to traditional bond funds that would produce tax-advantages and reliable cash flows. 

Millions of dollars in losses later, investors learned that Citigroup had employed a highly risky investing strategy known as municipal bond arbitrage, which entailed borrowing approximately $8 for every $1 raised. When the credit and bond markets began to experience trouble in the summer of 2007, ASTA/MAT started to lose value. Ultimately, the funds plummeted by some 90%.

Citigroup followed up the financial problems of ASTA/MAT by offering to compensate investors for their losses. The plan, however, translated into refunding only 45% to 55% of the value in their portfolios. To top it off, the deal required investors to forego future litigation against Citigroup.

Meanwhile, the New York-based bank is announcing pay hikes for certain employees.

“They just don’t get it,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn., of Citigroup. 

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.

Thousands of institutional investors that bought auction-rate securities on the premise they were cash equivalents are still waiting for their liquidity to materialize. By and large, corporate investors were not included in the settlement agreements that took place last summer when Wall Street banks and investment firms agreed to buy back billions of dollars worth of auction-rate securities from retail investors and small businesses as a way to settle state and federal charges alleging misrepresentation of the instruments. Instead, institutional investors continue to be left waiting in the wings, with no ARS solution in sight.

Auction-rate securities are long-term bonds or preferred stocks that pay interest or dividends at rates determined through auctions held every seven, 14 or 28 days. In February 2008, the market for auction-rate securities essentially collapsed, leaving both retail and institutional investors holding a supposedly liquid investment now considered worthless. 

Approximately $330 billion of auction-rate securities were outstanding when the auctions began collapsing in February. About $160 billion of auction rates remain outstanding following the settlements, according to a May 24, 2009, article in Investment News, with most paying very low “penalty” rates under the terms of the failed auctions.

The ARS buyback programs that were announced by brokerage firms in August 2008 failed to provide liquidity relief to institutional investors, offering instead only vague commitments to work with corporate investors on finding a solution for their ARS holdings. Even then, it could be years before institutional investors see any of their auction-rate securities redeemed for cash. 

Meanwhile, companies such as Citigroup, Wachovia, Merrill Lynch, and UBS Financial Services all face a growing list of individual lawsuits from institutional investors that have massive amounts of money still tied up in illiquid auction-rate bonds. To date, several investors have scored major legal victories in their ARS cases, including a February 2009 decision by a Financial Industry Regulatory Authority (FINRA) arbitration panel that awarded European chipmaker STMicroelectronics $406 million over a dispute with Swiss bank Credit Suisse Group and the unauthorized purchase of auction-rate securities.

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.