NEW YORK (Reuters) - An arbitration panel ordered Citigroup Inc to pay a group of investors $54.1 million for losses from municipal securities funds that cratered between 2007 and 2008, the biggest award yet involving the funds in a long series of legal claims against the bank.
Three investors — Gerald Hosier, Brush Creek Capital and Jerry Murdock — in June 2009 filed claims seeking $48.2 million of damages plus other relief related to their losses on investments, including six different leveraged municipal bond arbitrage funds sold by Citigroup Global Markets.
Citi marketed these funds as low-risk alternatives to a more traditional muni bond funds, but plaintiffs alleged that were misled about the risks involved in Citi’s arbitrage strategy. In some cases, the marketing materials produced by the bank were found false and misleading, and in others brokers did not properly apprise clients about the risks.
The ruling entered Monday said Citi must pay nearly $34.1 million in compensatory damages. The panel also ordered the bank to pay $17 million in punitive damages, $3 million in lawyer fees and about $80,000 in other costs for an arbitration process spanning 23 sessions since last October.
“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” Citi spokeswoman Danielle Romero-Apsilos said in an emailed statement.
Citigroup sold a series of funds through an entity called MAT Finance LLC. MAT stands for municipal arbitrage trust. These funds borrowed at low short-term rates and invested proceeds in longer-term muni bonds.
But the strategy was ultimately shown to be flawed and left investors with losses of as much as 80 percent.
Marketing materials for the MAT Five fund, obtained by Reuters, show Citi wanted to exploit the spread between muni bond yields and the rates the bank thought they should pay.
The fund theorized that AAA-rated muni bonds should trade like U.S. Treasuries, adjusted for their federal tax exemption, but dismissed the ideas that yields also reflect munis’ credit risk, are less liquid and are callable.
These funds are the subject of a Securities and Exchange Commission probe and have cost Citi dearly in recent rulings.
In February, a Florida panel awarded an investor $6.4 million, which until now was the largest award related to these funds, plaintiff lawyers said.
Craig McCann of Securities Litigation and Consulting Group, a firm that provides expert witness testimony for investor litigation, said Citi customers have so far prevailed in 11 out of 13 Citigroup MAT cases he was involved with and recovered $70 million.
Some two dozen cases have been heard by panels or settled, and lawyers have many more cases pending.
Citi shares rose 2 cents to $4.55 in Tuesday trade.
Citigroup last fall lost a high-profile case to Larry Hagman, the actor who played J.R. Ewing in the 1980s TV show “Dallas,” and was ordered to pay over $11 million in damages.
But the award was appealed by the bank and thrown out in February by a California state judge. That decision has been appealed by Hagman, whose lawyers also represented the Hosier investor group.
Hosier is an intellectual property lawyer and a managing partner of Brush Creek, a family investment firm. Murdock is a founder of New York investment firm Insight Venture Partners.
Reporting by Joseph A. Giannone; Editing by Lisa Von Ahn, Gerald E. McCormick, Gary Hill