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From Securities Regulation Daily, August 17, 2015

Citigroup affiliates to shell out $180M for fraudulent statements

By Amy Leisinger, J.D.

The SEC charged two Citigroup affiliates with making fraudulent statements to investors in order to secure investments in two now-defunct hedge funds. According to the SEC, the companies misrepresented the investments as “safe,” “low-risk,” and suitable for traditional bond investors despite their dire condition and the disclosures made in investor materials. To settle the charges, the respondents agreed to censure and a cease-and-desist order and consented to pay disgorgement and a prejudgment interest totaling nearly $180 million (In the Matter of Citigroup Alternative Investments LLC and Citigroup Global Markets Inc., Release No. 33-9893, August 17, 2015).

In a press release, SEC Enforcement Director Andrew Ceresney said: “Firms cannot insulate themselves from liability for their employees’ misrepresentations by invoking the fine print contained in written disclosures. Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster.”

Allegations. According to the Commission, from September 2002 through February 2007, financial advisers associated with Citigroup Global Markets Inc. (CGMI) recommended and sold billions of dollars of interests in hedge funds managed by Citigroup Alternative Investments LLC (CAI). Investors in the funds effectively paid advisory fees for two tiers of advice from the CGMI advisers and from CAI as the funds’ manager, but, the SEC alleged, the companies made false and misleading representations, as neither of the hedge funds involved the “low-risk” investment described to investors. Throughout this period, the Commission stated, the respondents’ employees continued to verbally assure investors of the safe, well-capitalized nature of the investments and minimize potential risks, statements directly contradicting disclosures made in written materials provided to investors. Even as the funds neared collapse, CAI and CGMI made no effort to require changes in fund descriptions to investors, according to the SEC.

By their conduct, the Commission contended, the firms willfully violated the antifraud provisions of the Securities Act and the Investment Advisers Act by failing to control their employees’ contradictory statements and misrepresentations, and CAI failed to adopt and implement policies and procedures to the violations.

Sanctions. Without admitting or denying the Commission’s findings, both firms consented to censure and to cease and desist from committing or causing further violations. The respondents also agreed to pay disgorgement of nearly $140 million, plus prejudgment interest of approximately $40 million, and to bear the costs of distributing the settlement funds to harmed investors.

Ineligible issuer waiver. The SEC granted Citigroup’s request for relief from being considered an “ineligible issuer” under Securities Act Rule 405 in connection with the cease-and-desist order against CGMI and CAI. According to the SEC, the company made a showing of good cause that it should not be considered an ineligible issuer so long as CGMI and CAI fully comply with the terms of the order.

The releases are Nos. 33-9893 and 33-9894.

Companies: Citigroup Alternative Investments LLC; Citigroup Global Markets Inc.; Citigroup, Inc.

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