FINRA Orders Citigroup to Pay $6.4 Million to Investors for Losses in Municipal Arbitrage Fund

On Monday, a three-member FINRA arbitration panel awarded a group of investors $6.4 million in an arbitration claim against two units of Citigroup Inc. for losses related to investments in a series of MAT Finance LLC funds (“UPDATE: Finra: Citigroup To Pay $6.4M For Municipal Arbitrage Loss,” Dow Jones Newswires, Feb. 8, 2011).

The MAT Finance municipal arbitrage trust funds were touted as an “attractive alternative” to a bond index, according to a Nov. 6 article by the WSJ (“Citi Debt Funds Probed by SEC”). The funds were designed to borrow money at low short-term rates and reinvest the borrowed funds into longer-term bonds with higher rates of return. Eventually, according to the WSJ, the funds ended up with $8 in borrowed money for every $1 invested.

According to the Dow Jones Newswire, it was after the funds lost almost 80 percent of their value between 2007 and 2008, that the group of investors (which included D. Theodore Berghorst, chairman and chief executive of Vector Securities LLC in Deerfield Ill., and various trusts and limited liability companies) brought their claim against Citigroup Global Markets Inc. and Citigroup Alternative Investments LLC. In their claim, the investors alleged civil fraud, misrepresentation, and breach of fiduciary duty and requested $12 million in damages.

The $6.4 million award, while it is the one of the largest awards for losses related to MAT Finance funds, is substantially less than the amount the investors requested. Additionally, one of the arbitrators in the three-member panel dissented in Monday’s ruling. No explanation for the dissent was given. Still, the award may be a signal that Citigroup will continue to be held liable for investor losses related to the MAT Finance funds.


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