Citigroup's Settlement Offer To Falcon And ASTA/MAT Investors May Not Be Sufficient

Recently, the Wall Street Journal ran an article focusing on Citigroup's push on hedge funds known as Falcon and ASTA/MAT.  The losses by these two hedge funds are the latest examples of the credit crunch hammering retail, or individual, investors who believed they were holding low-risk securities. 

These funds have plunged more than 75% or more.  The mess is another black eye for Citigroup according to the Wall Street Journal.  But interestingly, this time, the sales machine shifted into overdrive, pitching these funds as ideal investments for conservative retirees.  While Citigroup defends its handling of the hedge funds, saying they were offered only to clients with large diversified portfolios, that appears to have been belied by brokers who sold the funds.  According to some brokers, Citigroup brokers and fund managers assured prospective investors that the new hedge funds were low-risk, with Falcon likely to post losses of no more than 5% a year in the worst-case scenario. 

Falcon invested in municipal bonds, mortgage-backed securities, bank loans and other debt instruments, while ASTA/MAT emphasized municipal bonds.  Each was comprised of different funds that were launched periodically.  Until turmoil rocked financial markets last summer, the funds racked up strong returns, boosted by heavy doses of leverage. 

Last year, as Citigroup was gearing up to launch new Falcon and ASTA/MAT funds, it encouraged brokers at Smith Barney and in Citigroup's private bank to pitch the funds to their best customers.  One reason for the push:  Initial market tremors caused the Falcon family to decline by more than 10%, and Citigroup hoped to stabilize it with an infusion of cash.

By September, the new Falcon fund had raised about $71 million and the new ASTA/MAT fund raised about $800 million.  As of March 31st, the new Falcon fund was worth just 25% of its initial value, according to internal documents.  The ASTA/MAT fund had shriveled by February 29 to less than 10% of its original value, the documents show. 

According to the Wall Street Journal, even as their performances deteriorated, the 41-year-old manager of the funds reassured uncertain brokers and clients that the funds were likely to rebound, according to people familiar with the matter. 

Under a compromise that Citigroup has reached with investors, and is offering to them as we speak, Citigroup's wealth-management unit has agreed to spend $250 million to allow Falcon investors to exit from their positions without absorbing the fund's full losses, if investors would agree to forfeit all legal claims against the funds.  Some ASTA/MAT investors will get a similar offer.

SNSFE continues to investigate whether such settlement is appropriate and fair to investors.

Meanwhile, according to the Wall Street Journal, in the future, Citigroup will scale back its marketing of hedge funds to retail customers.  It's about time.

Source:  Wall Street Journal