Citi To Cover Some Hedge Fund Losses

Date: Wednesday, April 30, 2008
Author: FINalternatives

Citigroup plans to offer compensation to investors in a pair of its hedge funds in an effort to hold on to some of its top retail brokerage customers and head off a flurry of lawsuits.

The hedge funds, one in the Falcon family and the other in the ASTA/MAT family, are down 75% and 90%, respectively, The Wall Street Journal reports. At least one investor has already sued the firm, while a south Florida law firm has also filed suit, seeking class-action status.

The decision to bail out some investors reportedly comes after weeks of rancorous internal debate.

Sallie Krawcheck, head of global wealth management at Citi, led the push to cover some of the losses—according to the Journal, investors are to be offered 45 cents to 54 cents on the dollar—while other executives insisted that investors knew what they were getting into. That remains the party line at Citi, in spite of the decision to offer compensation to Falcon investors and some of the ASTA/MAT investors, with a spokesman saying in a statement, “Our disclosure and marketing material sufficiently outlined the inherent risk in the funds and their leveraged strategies.”

Some of Citi’s Smith Barney brokers would disagree. According to the Journal, Citi pushed its broker network to market the new funds to clients as a conservative option. The brokers then told investors that Falcon would lose no more than 5%, even under a worst-case scenario.

One Smith Barney broker complained to Citi CEO Vikram Pandit that the firm is doing “just enough so they don’t sue us.” The Journal reports that some of Smith Barney’s top brokers have quit in frustration, and Krawcheck argued that the firm had to do something to hold onto Smith Barney’s best clients.

Under the plan, Citi will pay $250 million to allow Falcon to exit some of its disastrous (and highly-levered) debt investments without eating the full loss. Investors who take the payout will have to waive their rights to sue Citi over the losses. The firm has also decided to strictly limit retail marketing of hedge funds in the future.