Fixed Income

‘Unpersuasive’ Citi must pay whopper of an award to former clients

Judge upholds Finra's earlier decision in muni bond fund dispute; ordered to pony up $54M

A federal judge in Colorado yesterday upheld a huge arbitration award of $54.1 million to former clients of Citigroup Global Markets Inc. The claimants sued the bank in 2009 after sustaining losses from a series of municipal bond funds Citigroup sold through a group called MAT Finance LLC.
MAT, which stands for municipal arbitrage trust, created funds that borrowed at low, short-term rates and invested in longer-term municipal bonds, according to published reports. The strategy fell apart in 2007 and 2008, and clients saw losses of up to 80%, according to published reports.
The former Citigroup clients, Gerald Hosier, Jerry Murdock Jr. and Brush Creek Capital LLC, filed their complaint with the Financial Industry Regulatory Authority Inc. in 2009, initially winning a $54.1 million Finra arbitration award in April. Citigroup then appealed the ruling.
Federal judges are quite reluctant to overturn Finra arbitration awards. “Maximum deference is owed to the arbitrators because the parties have contracted to use binding arbitration rather than litigation as a means to resolve their disputes,” U.S. District Judge Christine Arguello wrote in the order.
“We are disappointed with the decision,” wrote Citigroup spokesman, Danielle Romero-Apsilos.
The ex-clients alleged in their Finra statement of claim that Citigroup marketed the product to high-net-worth individuals as a higher-yielding alternative to municipal bond portfolios that carried little, if any, additional risk.
The claimants also asserted that Citigroup misrepresented the risks involved in these products in lieu of making or continuing direct investment in highly rated and insured municipal binds or like securities.
Citigroup’s original defense, meanwhile, was that the claimants had signed subscription agreements in which they stated that they had read and understood the written risk disclosure, including the warning that they could lose all of the principal they were investing, according to the order.
Citigroup argued that the award should be vacated because the arbitration panel disregarded legal precedents in making the award and that the panel also did not follow Finra procedures.
“The Court finds [Citigroup’s] argument wholly unpersuasive,” Ms. Arguello wrote regarding Citigroup’s claim the panel manifestly disregarded the law.
The original Finra award ordered Citigroup to pay $34.1 million in compensatory damages, $17 million in punitive damages, $3 million in legal fees and about $80,000 in costs related to the arbitration process.