Citigroup Inc., the third-biggest US bank, was ordered to pay more than $51 million to a group of investors in its MAT and ASTA municipal bond hedge funds, which regulators began examining more than two years ago.
The ruling by arbitrators at the Financial Industry Regulatory Authority, which oversees US brokerages, includes $17 million in punitive damages, according to a copy of the panel’s decision posted yesterday on the regulator’s website. It’s the third-largest arbitration award by Finra and predecessor NASD since 1988, according to Securities Arbitration Commentator Inc., a Maplewood, N.J., legal publishing and research firm.
“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in an e-mailed statement.
The Securities and Exchange Commission has questioned former Citigroup brokers as part of a probe into whether the bank misled investors about risks associated with certain debt funds, people familiar with the matter said last year. Citigroup disclosed the inquiry into the MAT and ASTA funds in August 2008, after the funds tumbled to values ranging from 10 cents to 60 cents on the dollar amid souring credit markets early that year. The two funds had $15 billion in assets and about $2 billion in capital.
Arbitrators didn’t explain the reasoning behind their ruling. They ordered Citigroup to pay $21.7 million to patent attorney Gerald Hosier, $8.5 million to Brush Creek Capital LLC, which is owned by Hosier’s family, and $3.9 million to venture capitalist Jerry Murdock Jr., the ruling shows. The plaintiffs had accused the bank of breaching a fiduciary duty, contract violation, fraud, breaking Finra rules, and supervisory failures.
The bank must also pay the claimants’ $3 million legal fees, according to the ruling.