Category Archives: ASTA MAT hedge funds

Citigroup’s legal bills for arbitration claims from investors involving a failed group of fixed-income alternative funds known as ASTA/MAT keep growing. So far, the tally to reimburse investors who lost money in ASTA/MAT is some $85 million. And it could get even higher because more cases are scheduled for arbitration this year and next.

The ASTA/MAT funds lost some 90% of their value beginning in 2008. The funds, which investors say had been marketed as less risky and more profitable than other fixed-income and municipal investments, were highly leveraged and borrowed approximately $10 for every $1 raised. As the ASTA/MAT funds began to lose money, Citigroup managers continued to sell the products and employ highly speculative investment strategies.

Investors who have since filed arbitration claims with the Financial Industry Regulatory Authority (FINRA) allege that Citigroup and its managers intentionally misled them about ASTA/MAT and were well aware of the risks involved with the funds.

Internal Citigroup records and e-mails about ASTA/MAT appear to back up investors’ claims. As reported March 21 by USA Today, one such e-mail shows Citigroup had put an internal credit risk rating on ASTA/MAT at the highest and most volatile level possible.

“The biggest surprise is the damaging internal e-mails and the extent to which (Citigroup) people committed to writing that these were defective (investment) products,” said Steven Caruso, a partner with Maddox, Hargett & Caruso, in the USA Today article.

Caruso’s firm, along with the law firm of Aidikoff, Uhl & Bakhtiari, secured a $54 million judgment on April 11, 2011, for investors who suffered financial losses in Citigroup’s MAT/ASTA municipal bond funds and several other purported fixed income-related products. The award is the largest ever levied against a major Wall Street brokerage in favor of individual investors.

The ASTA/MAT funds have been the subject of an investigation by the Securities and Exchange Commission (SEC) for more than four years now. So far, details of that investigation have not been made public.

Meanwhile, investors like Ronald Beard keep waiting for an explanation. Beard and his family invested $400,000 in MAT/ASTA in 2007 on the recommendation of an advisor with Citigroup’s private banking arm. In the end, Beard lost almost all of his investment.

“We felt betrayed, and we were shocked,” Beard said in the USA Today story.

Christopher Puglisi of New Jersey also invested in ASTA/MAT in 2007 through an account at Citigroup’s Smith Barney division. He did so only after he was satisfied the money he invested from the sale of his trading business would be safe.

Instead, Puglisi lost more than $700,000.

A Los Angeles Financial Industry Regulatory Authority (FINRA) arbitration panel has awarded investors more than $550,000 in damages for their complaint involving a fixed-income municipal arbitrage investment known as MAT Three.

Created and launched by Citigroup Global Markets and sold through Smith Barney in February 2006, MAT Three was represented as a fixed-income alternative product – an investment that supposedly had similar volatility to that of the Lehman Brothers Aggregate Bond Index. In reality, the highly leveraged fund exposed investors to 100% or more loss of principal and was 2.5 times more volatile than the S&P 500 and 7.8 times more volatile than a traditional portfolio of municipal bonds.

When MAT Three imploded in February 2008, investors suffered devastating losses.

“Despite widespread evidence that Citigroup misrepresented MAT’s risk level to its own brokers, who then passed the misleading information on to their clients, Citigroup elected to employ the ‘blame the customer’ defense,”’ stated Steven B. Caruso of Maddox Hargett & Caruso, P.C. “The FINRA arbitration panel obviously rejected this defense.”

Maddox Hargett & Caruso, P.C. and Aidikoff, Uhl & Bakhtiar provided legal representation to the investors in the case.

The award represents a return of 100% of the investors’ losses, according to Caruso, who says that the win is the second significant investor win in a MAT case for his firm’s clients in recent weeks.

Speaking at the Barclays Capital Global Financial Services Conference on Sept. 15, Citigroup CEO Vikram Pandit for the first time announced publicly that he anticipates the bank to divest its entire 49% stake in Morgan Stanley Smith Barney LLC.

New York-based Citigroup has been among the country’s hardest-hit financial institutions from the credit crisis. Over the past 18 months, the struggling bank – which Richard Shelby, R-Ala., referred to in March as a “problem child” – slashed its assets by $500 billion. As a result of ongoing liquidity concerns, Citigroup has borrowed about $45 billion in taxpayer bail-out money through the Troubled Asset Relief Program.

Citi also continues to face mounting legal and financial woes over its alternative investments, including the ASTA/MAT hedge funds. Currently, the funds are at the center of numerous lawsuits and arbitration claims with the Financial Industry Regulatory Authority (FINRA) by investors who allege Citigroup misrepresented the products as safe, conservative and stable fixed-income investments. Any losses were projected to be minimal – no more than 5% a year in the worst-case scenario, according to the company.

Instead, ASTA/MAT plummeted in value last summer because of turmoil in the financial markets and housing markets. During the same time the funds were sinking, however, Citigroup allegedly told investors to “stay the course” and that ASTA/MAT would rebound once the markets stabilized.

That didn’t happen. As it turns out, the ASTA/MAT funds were highly leveraged, borrowing approximately $8 for every $1 raised. Meanwhile, the managers ASTA/MAT continued to invest in some of the most risky and speculative investments possible.