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Citigroup To Pay $2.43M For Municipal Arbitrage Fund Loss – Finra Panel

Wall Street Journal

A unit of Citigroup Inc. (C) must pay a group of investors a total of $2.43 million for losses they incurred in a municipal arbitrage fund that lost about 80% during a period between 2007 and 2008.

Five Memphis-based investors filed the claim in 2009, seeking damages related to MAT Five, which is among a series of funds, MAT Finance LLC, short for municipal arbitrage trust. The funds, which are the subject of a Securities and Exchange Commission probe, borrowed at low short-term rates and invested in longer-term bonds that paid higher rates. The Wall Street Journal reported the SEC probe in a story on Nov. 8.

Citigroup Global Markets, Inc. was accused by the investors of misrepresenting the fund’s risk and breaching its fiduciary duty, among other allegations, according to a Finra panel ruling dated Dec. 1. The $2.43 million fully compensates the investors for their out-of-pocket losses and interest they would have received if they invested in a municipal bond portfolio, according to their lawyer, Ryan Bakhtiari, of Aidikoff Uhl & Bakhtiari in Beverly Hills, Calif.

“It’s a very significant award,” he said.

Although bonds are generally less volatile than stocks, the MAT funds eventually borrowed more than $8 for every $1 invested, magnifying the risk from even small changes in the bonds’ value. The funds were typically sold to very high net-worth investors and marketed as an alternative to municipal bond portfolios, according to Bakhtiari.

The investors in the case purchased the funds in February, 2007 through Smith Barney, then Citigroup’s retail brokerage. Smith Barney and Morgan Stanley merged their brokerage operations in 2009.

As occurs in most securities arbitration awards, the Finra panel did not spell out details of the case or the reasoning behind its decision.

A Citigroup spokesman said that Finra panels “have reached inconsistent decisions on these claims, which we continue to believe are meritless.”