Category Archives: Citigroup

Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study – which claims to be the first professional and academic report to analyze the structure of non-traded REITs – shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report – and one which has been touted in general by critics of unlisted REITs – is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors: 

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold – their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us. 

Overconcentration in certain preferred stocks has devastated the portfolios of thousands of investors. Problems first began when already fiscally troubled companies such as Fannie Mae (FNM), Freddie Mac (FRE), Lehman Brothers (LEH) and Citigroup (C) issued shares of preferred stocks as a way to raise capital. In turn, a number of brokerage firms marketed the preferred stocks of these companies and the preferred shares of other companies in the banking, insurance and financial sectors as safe and stable investments for income-minded investors, causing investors to over-concentrate their portfolios.

Diversification is the No. 1 rule of investing. When an investor places his or her money into one asset class or market sector, the potential for increased and unnecessary risk of loss goes up dramatically. In the case of certain preferred shares, many brokers failed to disclose not only the potential risks associated with the investments but also failed to provide an accurate picture of the financial health of the issuing companies. In reality, many of these companies were in dire financial straits, having already taken huge financial hits on their balance sheets as a result of losses connected to the mortgage meltdown.

A preferred stock essentially is a security issued by companies to raise capital from investors. The advantage of owning a preferred stock is it pays fixed dividends. Banks and other financial institutions are among the main issuers of preferred stocks, accounting for approximately 80% of the S&P U.S. Preferred Stock Index.

In the past year, however, when share prices of preferred stocks suffered massive losses because of the health of the issuing companies, investors quickly discovered that their preferred shares were not working out as planned. Case in point: Fannie Mae, Freddie Mac and Citigroup.

All three companies were forced to seek financial bailouts from the federal government in order to stabilize their business. This in turn caused the price of their preferred stock to plummet. In other cases, such as with Lehman Brothers Holdings, the company’s financial health was beyond repair, making bankruptcy the only option. As a result, preferred stock holders were left with millions of dollars in investment losses.

On April 9, 2009, a class action lawsuit was filed on behalf of purchasers of Citigroup’s 8.50% Non-Cumulative Preferred Stock, Series F. Among the allegations, the complaint alleges that when Citigroup announced its May 2008 offering of the Preferred Stock, it did so with a false and misleading Registration Statement and Prospectus. Once the offering was complete, Citigroup announced billions of dollars in write-downs because of exposure to debt securities. Investors holding Citigroup’s preferred stock subsequently watched the share prices of their investment fall dramatically.

Preferred shares in Fannie Mae and Freddie Mac also have caused financial devastation for preferred shareholders. On Sept. 8, a mountain of losses forced both companies into a government conservatorship run by the Federal Housing Finance Agency. The government’s seizure of the two lenders essentially wiped out any value that common and preferred stockholders had in the two companies.

Many preferred shareholders in Fannie Mae and Freddie Mac had been told that the risk of investing in either company was minimal, prompting them to over-concentrate their holdings in the companies. When the government’s takeover was announced, they watched helplessly as large percentages of their investments essentially vanished overnight.

Brokers have a fiduciary duty to recommend investments that are within a client’s risk tolerance. They also must provide accurate, material facts regarding those investments. When this duty is breached, investors have the right to hold them accountable by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

If you are a preferred shareholder who suffered investment losses because a brokerage or financial advisor misrepresented the risks of certain preferred stocks, please contact us. We want to hear your story, and advise you of your legal rights.

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.

In the wake of the collapse of the auction rate securities market in February 2008, many of the nation’s largest financial institutions quickly agreed to settlements with state securities regulators as a way to resolve charges they misled retail and institutional investors about the liquidity risks of the instruments they underwrote.

The latest state to order a Wall Street institution to buy back auction rate securities from investors is Pennsylvania, which on Aug. 11 ordered Wells Fargo & Co.’s Wachovia unit to buy back $324.6 million of auction rate securities from an estimated 1,300 Pennsylvania retail investors.

Wachovia also will pay a $2.52 million assessment to the state for its role in the auction rate securities market.

In a press release on the ARS agreement with Wachovia, Pennsylvania Securities Commissioner Steven Irwin said the bank “marketed and sold these securities as safe, liquid and cash-like investments when, in fact, they were long-term investments subject to a complex auction process that failed in early 2008, leading to illiquidity and lower interest rates for investors.”  

The Pennsylvania Securities Commission is continuing its investigation of other investment firms and their sales of auction rate securities. In July, the regulator ordered TD Ameritrade to repurchase $26.5 million of auction-rate securities. That same month, Pennsylvania also reached a settlement with Citigroup over ARS sales. That settlement, which was part of a larger deal agreed to with 12 states, required Citigroup to buy back $978.1 million worth of auction rate securities from Pennsylvania investors. In addition, Citigroup paid a $2.31 million fine to the Pennsylvania Securities Commission.

Citigroup CEO Vikram Pandit contends the bank whose stock fell below $1 last week is poised for a rebirth. As reported in a March 9 article in the Wall Street Journal, Pandit told colleagues that despite Citi’s ongoing financial issues and market perception, the bank’s capital strength and earnings power ultimately would enable the company to regain its fiscal footing in the future.

In the memo to employees, Pandit noted Citigroup’s “relatively stable” deposits, and that the bank had conducted its own stress tests using assumptions more “pessimistic than those of the Federal Reserve.” Pandit did not elaborate, however, about Citigroup’s internal stress tests.

At one time, Citigroup was the world’s biggest bank by market value. Two years ago, that value was more than $270 billion. Today, Citigroup stock has plummeted 95%, reducing the bank’s market value to about $5.8 billion.