Citigroup Hedge Fund: Monumental Losses

La Habra, CAInvestors who had money in Citigroup's Falcon Hedge Fund have lost a lot. Unfortunately, they did not realize that the investment they were making was at all risky. They were told that the investment was solid, "bullet-proof" even, and there was nothing to worry about. Even as the fund lost more and more money, Smith Barney advisors were telling people not to worry about Citigroup's fund. By the time the advisors changed their tune, it was too late and people lost much of their investment.

An investor from La Habra, California (who did not want to be named for this interview) says he lost hundreds of thousands of dollars in the Falcon investment.

"I have been investing with the Smith Barney Group for two to three years now. I generally invest in double-tax-free municipal bonds in the millions of dollars. I am a very conservative investor, usually AA or AAA rated, insured products.

"They [Smith Barney advisors] mentioned funds coming up that were 'bullet-proof'. They told me they may offer the funds to me, but I would have to be a qualified investor, which meant I had to have three to five million dollars in investments with them, which I did. So, they offered me the fund, saying, 'The Falcon fund is available, but you have to respond to this immediately.'

"They sent me a package about an inch thick that I had to read right away. I phoned the advisors and said, 'I can't read this and get back to you today.' They said, 'Don't worry, it's bullet-proof. It's as bullet-proof as the municipal bonds you invest in. The minimum buy-in is $500,000 but it will give you a seven percent return, paid twice a year.' They also offered me another fund, but it was more risky so I went with the first one [the Falcon #4]."

So the investor went ahead, signed the package, wrote a check for $500,000 and sent everything to Smith Barney. This all occurred in October 2007. It was less than 30 days before things started to go wrong.

"When the first statement came back to me, my $500,000 shrunk to $475,000. I called and asked what happened but I was told there was a glitch in the market and I would still be paid the seven percent."

Another month later and the investor's $500,000 had sunk to between $402,000. He called a senior partner at Smith Barney and asked him to come to a meeting with his CPA. The senior partner came and continued to assure the investor that the investment was bullet-proof.

"He assured me that a very small percentage of the fund was in mortgage-backed securities," The investor says.

"Thirty more days and the fund had dropped into a record low. At this point, Smith Barney and Citigroup were starting to have conference calls that you could call in and listen to what they had to say. They were still saying that the fund would recover but it would take a little longer than three years to recoup the fund.

"Another 30 days [around four months after the initial investment] and the fund has dropped into the $200,000's. I've now lost more than 50 percent of my initial investment. There is another conference call, only this time we are being told that the fund will never recover because there is too much invested in mortgage-backed securities. They [Smith Barney] are telling people that they will not pay any dividends on the fund and any people who were in the fund for longer than three years [meaning they should have been eligible to sell their investment] would not be able to make a sale because they have suspended all sales and dividends. All we could do was watch the fund sink.

"We [the investor, his business vice-president and his CPA] were lied to by the local Smith Barney people. We were told that this was a rated paper and we would never get burned. The only downside they told us about was that I would have to wait three years before I could take my money out, but I was guaranteed a seven percent return.

"During this entire process, we asked every question under the sun. We were told that there was never a question of any kind of risk whatsoever. If there were any risk, I would not have considered the fund. I'm going to move all my investments [from Smith Barney] as soon as they start rolling into cash. I'm not happy with them at all.

"Right now, the investment is worth $135,775 on my books. It went from $500,000 to $135,755. The problem that I see is that they didn't invest the money in the way they told you they would. They told you that the money was invested into certain funds but it was invested in other funds."

The investor's CPA, who also preferred to remain nameless for this article, says that the Smith Barney people were not at all forthcoming with information regarding the Falcon Fund. "The implication was that the $500,000 may fluctuate during the investment, but by maturity investors would get their $500,000 back and they would still get seven percent on that $500,000 the whole time. None of that has come true."

If you lost money on Citigroup's Falcon Funds, contact a lawyer to discuss your legal options.