The Morning Brief: Citigroup Settles Fraud Charges with SEC

Citigroup has agreed to pay nearly $180 million to settle Securities and Exchange Commission charges that two of its affiliates defrauded investors in two hedge funds. According to the regulator, Citigroup Global Markets (CGMI) and Citigroup Alternative Investments (CAI) claimed the funds were “safe, low-risk, and suitable for traditional bond investors.” However, the funds eventually collapsed during the financial crisis.

The SEC says an investigation found that the Citigroup affiliates “made false and misleading representations to investors” in the ASTA/MAT fund and the Falcon fund. The two funds had raised nearly $3 billion from roughly 4,000 investors.

“In talking with investors, they did not disclose the very real risks of the funds,” the SEC states in its announcement. “Even as the funds began to collapse and CAI accepted nearly $110 million in additional investments, the Citigroup affiliates did not disclose the dire condition of the funds and continued to assure investors that they were low-risk, well-capitalized investments with adequate liquidity. Many of the misleading representations made by Citigroup employees were at odds with disclosures made in marketing documents and written materials provided to investors.”

The ASTA/MAT fund is described by the SEC as a municipal arbitrage fund that purchased municipal bonds and used a Treasury or LIBOR swap to hedge interest rate risks. The Falcon fund was a multistrategy fund that invested in ASTA/MAT and other fixed income strategies, such as collateralized debt obligations, collateralized loan obligations, and asset-backed securities. The funds were managed by CAI and sold only to advisory clients of Citigroup Private Bank or Smith Barney by financial advisers associated with CGMI.


Fir Tree Partners cut its stake in CDK Global to 6.7 percent of the total outstanding shares, unloading stock for between $51.02 and $56.68 per share between June 16 and August 12. As a result of the sales, the New York hedge fund firm slips from being the company’s second-largest shareholder to the third largest. At the end of the second quarter, activist hedge fund firm Sachem Head Capital Management remained the largest shareholder, while Elliott Associates nearly quadrupled its stake to become the fourth-largest shareholder. John Griffin’s Blue Ridge Capital became the ninth-largest shareholder of the software company, which serves the auto industry and was spun off from Automatic Data Processing last October.
Paul Singer’s Elliott Management Corp. more than doubled its stake in Mitel Networks to more than 8 million shares, or 6.7 percent of the telecom services provider.


Shares of Tesla Motors jumped more than 4 percent on Monday after Morgan Stanley stunned Wall Street when it lifted its price target on the maker of the electric car from $280 to $465. The investment bank tells clients the company “is uniquely positioned to dominate,” adding in a note to clients: “Firms with expertise in autonomous tech and networked machine learning can exploit the inefficiencies in the current model.” Unfortunately, not many hedge funds were in a position to benefit from this gargantuan upgrade in a big way. The only hedge fund among the top-20 shareholders at the end of the second quarter was Daniel Benton’s Rye Brook, New York-based Andor Capital Management. However, the stock is his largest position, accounting for one-quarter of his U.S. equity assets.