The Securities and Exchange Commission (“SEC”) announced that Citigroup Global Markets, Inc. (“CGMI”) and Citigroup Alternative Investments LLC (“CAI”) have agreed to settle charges concerning two now-defunct hedge funds – the ASTA/MAT fund and the Falcon fund. According to the Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 15(b)(4) of the Securities Exchange Act of 1934, and Sections 203(e) and 203(k) of the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), CGMI and CAI will pay $180 million in disgorgement and prejudgment interest.
According to the Order, between 2002 and 2007, financial advisers at CGMI raised approximately $2.898 billion for the ASTA/MAT and Falcon funds from roughly 4,000 advisory clients. Both hedge funds were managed by CAI.
ASTA/MAT was a municipal arbitrage fund that purchased municipal bonds and used either a Treasury or LIBOR swap to hedge interest rate risk, according to the SEC. An arbitrage fund is a type of mutual fund that leverages the price differential in the cash and derivatives market to generate returns. The Order states that ASTA/MAT employed an 8-12 times leverage.