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Investors Charge Citigroup With Fraud Over Falcon Hedge Fund

The unspoken code of ethics between investment banks and securities firms and investors continues to be called into question these days. Now it is Citigroup in the spotlight, with investors charging that they were kept in the dark about potential risks in the bank's Falcon Strategies Two B LLC Hedge Fund.

The 18-page class action lawsuit - filed April 4, 2008, in Florida federal court – covers purchasers of the Falcon Strategies Two B LLC Hedge Fund from September 2005, through January 2008. Following the meltdown in the credit market, the fund has lost more than 40 percent of its value.

Specifically, the suit accuses Citigroup Alternative Investment LLC of marketing the Falcon Strategies Two B LLC Hedge Fund as “low-risk” and “low-volatility,” and then failed to disclose the fund's change to a much riskier investment strategy. The suit also alleges that the fund's management used such a marketing approach to increase income from its “exorbitant fees.”

In February, Citigroup provided a $500 million line of credit to bail out the Falcon Strategies hedge funds and, as a result, moved $10 billion of the funds' assets and liabilities onto its already strained balance sheet.

Charges against the defendants include fraud, violations of the Florida Blue Sky Law, negligent misrepresentation, and violation of the 1933 Securities Act.

The recent influx of investor lawsuits and complaints has cast a black mark on the financial services industry, one that will likely take a long time to lift. When investors discover they've suffered irreversible financial loss because an investment bank or securities firm has mishandled their life savings or failed to disclose an investment's true risk, it is their right to take action.

If you are like a growing number of investors who have suffered damages as a result of questionable investment advice, we encourage you to contact us.

More Trouble

The Falcon Strategies lawsuit isn't the only hedge fund problem to plague Citigroup. An April 16 article in BusinessWeek by Matthew Goldstein outlines even more troubles facing the bank, specifically six hedge funds that it has pumped $661 million into. The funds, sold under the brand names ASTA and MAT, used massive piles of leverage to buy municipal bonds, according to the article, “and borrowed approximately $8 for every $1 raised. When the muni market went haywire in February, the funds tanked. Even after Citi's emergency cash infusion this year, they are down 60 percent to 80 percent.”

As a result, several of Citigroup's high net worth clients – those with losses in the funds in the $2 billion range – have threatened to move their money to rival companies. Likewise, some of Citigroup's top brokers are considering a move from the bank, as well.

The last year has been a tumultuous one for Citigroup, as the company encountered a string of personnel and corporate problems:

  • In February, Citigroup suspended investor withdrawals from a $500 million credit hedge fund to give it a chance to stabilize. The London-based fund – CSO Partners – was facing investor redemptions following a 10 percent loss in November.
  • John Pickett, CSO's manager, abruptly left the company, after a disagreement with Citigroup and complaints from investors when he tried to back out from committing more than half the fund’s assets to buy leveraged loans tied to a German media company.
  • In the fourth quarter, Citigroup posted a record loss of $9.83 billion, hurt by write-downs tied to subprime mortgages and an increase in soured loans.

The latest legal woes for Citigroup of allegedly defrauding investors have become a familiar headline in the financial news lately. UBS, Merrill Lynch and Lehman Brothers all are facing investor lawsuits, as well, following the demise of the $330 billion auction-rate securities market.

At the crux of this litigation is a common theme – and that is investors are the heart and soul of any business. When once-trusted companies like Citigroup, Bear Stearns and others come under fire for attempting to deceive their “bread and butter,” investors will simply take their business elsewhere — or, even more appropriate, seek a legal resolution in the courts.

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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