MAT/ASTA Award Creates New Day on Wall Street

A precedent-setting arbitration award against Citigroup may foreshadow a new day on Wall Street. The $54 million award handed down by an arbitration panel of the Financial Industry Regulatory Authority (FINRA) focused on supposedly conservative and safe municipal bonds known as MAT/ASTA. In reality, the products were far from safe, with many investors seeing their portfolios plummet in value.

As reported April 23 by the New York Times, the investors who emerged victorious in the case are Gerald D. Hosier and Jerry Murdock Jr. Hosier and a trust he set up for his adult children received $48 million, while Murdock got about $6 million.

The two investors suffered $27 million in out-of-pocket losses on their investments. At the heart of the losses was a municipal bond arbitrage strategy that a broker from Citigroup’s Smith Barney unit had characterized as safe and designed to produce more income than a simple portfolio of bonds could generate.

That didn’t happen.

“Citigroup misled their wealthiest clients and then tried to blame them for relying on what they were told,” said Steve B. Caruso of Maddox, Hargett & Caruso P.C. in New York and the attorney for Hosier and Murdock.

Co-counsel Philip M. Aidikoff of Aidikoff, Uhl & Bakhtiari in Beverly Hills, Calif. added that, “Citigroup mismarketed this product to high-net-worth investors as an alternative to municipal bonds with a slightly higher return. Our clients never knowingly agreed to risk a significant loss of principal for a few extra points of interest.”

In addition to recovering all their losses in the award, the two investors also received damages. Hosier was awarded $15 million in punitive damages and $6.3 million in market-adjusted damages. The FINRA panel also awarded $3 million for legal fees.

As the New York Times article points out, Smith Barney and its brokers were the prime beneficiaries of the strategy used in the investment deals sold to Hosier and Murdock. Fees were collected on both the money that had been borrowed to ramp up the returns, as well as through the life of the investment itself. Clients paid 0.35 % annually on the portfolios, plus a fee of 20% of all income earned by the investors above a 5.5 % threshold each year.

Smith Barney’s sales representatives kept 40% of the total fees paid by their investors – an amount that far exceeds what they would have earned selling ordinary municipal bonds. According to the investors’ attorneys, the arrangement encouraged Smith Barney to increase the leverage in the portfolios, which in turn put the interests of the investors – Hosier and Murdock – and those of Smith Barney at odds.

FINRA’s decision may be sending a new message to Wall Street – one that paints an altogether different picture regarding the line of defenses that are often applied when clients sue.

For Hosier, the message is long overdue.