Citigroup Hedge Funds: Investors Lose Money and Trust

West Palm Beach, FLCitigroup is being slammed with lawsuits over its failed Falcon and ASTA/MAT hedge funds after poor performance and huge losses wiped out investor equity. Plaintiffs are alleging that the Citigroup offering was rife with misrepresentations that put the investor at risk, while Citigroup and brokers cleaned up on various fees and commissions that have been described as exorbitant.

Citigroup has since come along with a bailout settlement offer to investors in the failed hedge funds, of about half the value of the original investment. However, many lawyers close to the issue say those investors can do much better by taking Citigroup to court.

Plaintiff A. Robert Zeff is doing just that. The Boca Raton-based investor is serving as lead plaintiff in a class action lawsuit filed in South Florida Federal Court in April representing any investor who bought into the funds from September 30th 2005 through January 8th of this year.

The suit alleges that Citigroup Alternative Investments LLC touted the hedge fund's profile as being low-risk and offering minimal volatility, only to move the funds later into a riskier investment strategy without telling investors.

Those investors had a lot of money on the line. The minimum amount to get in was $500,000. Zeff was one of those investors who ponied up the half-million dollars for a fund that "was uniformly marketed to all potential investors as an extremely low risk investment that offered low volatility and tax protected distributions," according to the language of the suit.

As a means to back up that claim, the Citigroup offering had been tagged with an S2 volatility rating by Standard and Poors, with 1 representing the lowest risk and 6 suggesting the highest. Such a rating contributed to the belief that the Falcon fund could be expected to maintain a low-to-moderate sensitivity to change in market condition given its stated investment strategy.

As it happened, reality was anything but. It didn't help that the market turned into a bear at the behest of the sub-prime mortgage mess, spelling huge losses for any mortgage-backed security. However, beyond that Citigroup stands accused of manipulating the risk exposure of the Fund without duly informing investors.

The proof of the pudding came in January of this year, when Standard and Poors bestowed a volatility rating of S5, which suggests far greater risk

"This is a much different product than what was purchased by the Plaintiff, and others similarly situated who purchased the fund prior to Jan. 8, 2008," the suit says. "At all times, the Defendants were aware and knew high-risk investment and management strategies were being undertaken managing the Fund, but failed to disclose those investment strategies to existing investors and continued to market the fund as a low-risk investment tool for investors."

In February Citigroup bailed out its Falcon funds with a $500 million line of credit, and consolidated the Fund's assets—$10 billion dollars—onto its own balance sheet. It was reported to be Citigroup's second Fund bailout in as many months, and now it is looking at further costs with its settlement offer of anywhere from 45, to 54 cents on the dollar for investors of the various Falcon funds. Investors have until June 30th to make up their minds—and it they accept—they have to waive any right to future claims.

Legal minds say it's a roll of the dice; recoup roughly half your original investment now, or take legal action and hope for more—and risk getting nothing.

Investors having already lost both money, and trust in Citigroup and not satisfied with the Citigroup settlement offer, are prepared to take that risk. Lawyers have said investors have a pretty good case, based on the alleged conduct of Citigroup with respect to the management of the Falcon funds.

The Florida lawsuit, running at 18 pages and four counts, was filed in the State of Florida April 4th and accuses the defendants of fraud, violations of the Florida Blue Sky Law, negligent misrepresentation and violation of the 1933 Securities Act.