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FINRA Shakes Citi Unit For $54M Over Hedge Funds


The Financial Industry Regulatory Authority on Monday ordered a Citigroup Inc. unit to pay three investors more than $54 million for its mismanagement of poorly performing municipal bond hedge funds.
Gerald D. Hosier, Brush Creek Capital LLC and Jerry Murdock Jr. filed the claim in June 2009, alleging Citigroup Global Markets breached its fiduciary duty and FINRA rules in its promotion of the funds, which were eventually revealed to be riskier than advertised.

Those funds – including MAT Two LLC, MAT Three LLC and MAT Five LLC – have been the subject of numerous investor lawsuits and a U.S. Securities and Exchange Commission investigation.

A FINRA panel ruled Citigroup Global Markets must pay compensatory damages of $21.7 million to Hosier, $8.5 million to Brush Creek and $3.9 million to Murdock. The ruling also requires the company to pay $17 million in punitive damages and more than $3 million for the claimants’ attorneys’ fees and other court costs.

“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” a Citigroup spokeswoman said in an emailed statement Tuesday.

Attorneys for the claimants did not immediately respond to requests for comment.

The latest award is the largest by far that FINRA has granted in the matter of the MAT funds.

In February, an arbitration panel slapped Citigroup subsidiaries with a $6.4 million judgment in a case brought by Vector Securities LLC Chairman and CEO Theodore Berghorst and funds he controlled.

Berghorst claimed Citigroup said the MAT funds would be closely monitored in accordance with a sophisticated risk management strategy that would minimize risk or losses. Despite assurances the funds were secure and low-risk, the funds in fact lost a significant amount of money, he said.

In December, another award was made to five Tennessee investors who claimed the hedge funds caused them to suffer “catastrophic losses.”

The claimants in that case – Bertram E. Barnett Jr., Robert L. and Kathy C. Cockroft, Allen R. Graber, Bittjal Partners and Robert R. Yarbrough – received $2.4 million.

Citigroup is represented by Neal Gerber & Eisenberg LLP.

The case is In the Matter of the Arbitration Between Gerald D. Hosier et al. and Citigroup Global Markets Inc., case number 09-03297, in the Financial Industry Regulatory Authority.