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Citi Units Must Pay $6.4 Million Over Muni-Arbitrage Loss

2/8/2011

Wall Street Journal

Two units of Citigroup Inc. have been ordered to pay $6.4 million to a group of investors, including the head of a Chicago-area investment-banking firm, for losses they incurred in a family of municipal arbitrage funds.

The award by a divided securities arbitration panel represented a partial victory for the investors, who included D. Theodore Berghorst, chairman and chief executive of Vector Securities LLC in Deerfield Ill. The group originally asked for $12 million in damages from Citigroup Global Markets Inc. and Citigroup Alternative Investments LLC in 2008 for losses in a series of funds, run by MAT Finance LLC, that lost as much as 80% between 2007 and 2008.

The claimants, which included various trusts and limited-liability companies, alleged civil fraud, misrepresentation and breach of fiduciary duty, among other things, according to a Financial Industry Regulatory Authority securities arbitration panel ruling dated Monday.

Citigroup Global Markets is responsible for paying 75% of the total $6.4 million ruling while Citigroup Alternative Investments must pay the rest, according to the Finra panel ruling. It is among the largest awards involving the MAT Finance funds.

The chairman of the three-person arbitration panel dissented in the ruling without explanation. Dissents are unusual in arbitration cases, say lawyers, and can provide a basis for a claimant for trying to overturn a ruling in court.

As occurs in most securities arbitration awards, the Finra panel didn’t spell out details of the case or the reasoning behind its decision.

Mr. Berghorst and his lawyer didn’t return calls requesting comment.

MAT Finance short for municipal arbitrage trust, is the subject of a Securities and Exchange Commission probe, as reported by The Wall Street Journal in November. The funds were sold to high-net-worth investors through Smith Barney, then Citigroup’s retail brokerage. They borrowed at low short-term rates and invested in longer-term bonds that paid higher rates.

Despite their risks, the funds were marketed as an alternative to municipal-bond portfolios, according to Ryan Bakhtiari, a lawyer for Aidikoff Uhl & Bakhtiari in Beverly Hills, Calif., who has been representing investors in other cases involving the funds.

A Citigroup spokesman said the company is “disappointed with this award and point to the panel Chairman’s dissent.”

Mr. Bakhtiari contended that the dissent isn’t significant. He noted the only arbitrator on the panel who works in the securities industry sided with the investors. “It’s a sure sign that Citi will continue to lose,” he said. “If they can’t persuade the industry, where do they have left to go?”


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