Securities Fraud Attorney Blog

Below is a piece by Bloomberg on our firm's $383 million claim against Citigroup. There's more on this case on the firm's website at http://www.riklawfirm.com/

Citigroup’s Mathur Said to Depart With Hybrid Traders as Pandit Cuts Jobs
By Donal Griffin - Dec 9, 2011

Citigroup Inc. (C), the third-biggest U.S. bank, is shrinking a team of traders who deal in “hybrid” products as Chief Executive Officer Vikram Pandit cuts Wall Street jobs, two people familiar with the matter said.

Samir Mathur, former head of hybrid trading, is leaving the New York-based firm and is in talks to join a hedge fund, according to one of the people, who asked to remain anonymous because the move hasn’t been announced. Other members of the desk who reported to him, including Yontcho Valtchev, Vivek Kapoor, Eric Kim, Sean Corrigan and Allison Niiya, also are leaving, the person said.

Mathur is among ex-members of the desk who are at the center of a dispute with Ghazi Abbar, a former customer from Jeddah, Saudi Arabia. Abbar claims he lost $383 million of his family’s fortune when Citigroup sold him products that later soured, even though the bank internally questioned his ability to properly manage some of them. Pandit, 54, is shrinking the desk as he cuts 4,500 jobs amid a revenue slump.

“It makes sense for Citigroup to reduce the size of its sales trading activities, particularly in developed markets,” Richard Staite, an analyst at Atlantic Equities LLP, wrote in a Dec. 7 note to clients. “We believe a shift away from trading toward lower-risk consumer and corporate banking may lead to a higher valuation multiple.”

Mathur follows Erwin Parviz, the former London-based head of hybrid structuring who left Citigroup in June, according to U.K. Financial Services Authority records.

Investment Banking

Planned layoffs will include about 900 from the division that contains trading and investment banking, a person familiar with the matter said last month.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment. Members of the hybrid team didn’t respond to phone messages, said they couldn’t comment or couldn’t be located for comment. Citigroup, with 267,000 employees worldwide as of Sept. 30, is the third-biggest U.S. bank by assets behind JPMorgan Chase & Co. and Bank of America Corp.

Mathur’s team traded hybrid derivatives, financial instruments that derive their values from different underlying assets. Buyers seek to profit from the performance of assets, such as a stake in a hedge fund, without directly owning them. The desk often sold products to large investment firms including Man Group Plc (EMG) and Tudor Investment Corp., people familiar with the matter said last month.
Taxpayer Bailout

Mathur helped to create one of Abbar’s transactions, according to an arbitration claim Abbar has filed with the Financial Industry Regulatory Authority. The bank denies the allegations and has sued Abbar to block the arbitration.

Mathur has worked as a trader for Citigroup since 1998, according to Finra records. He rose to become head of hybrid trading before the bank almost collapsed in 2008 and received a $45 billion taxpayer bailout.

Colleagues of Mathur’s also are Wall Street veterans, Finra records show. Valtchev had worked for Citigroup since 2005 after stints with Deutsche Bank AG and Barclays Plc (BARC), while Kapoor joined in 2007 after working at UBS AG, Credit Suisse Group AG (CSGN) and Standard & Poor’s. Niiya had worked for Citigroup since 2000, according to the records. While most are traders, Kim is an analyst.

Below is an American Lawyer piece which explains our clients' pending $383 million FINRA arbitration against Citigroup. It goes on to talk about how there are more and more large and complex cases at FINRA. It's true. As partner John Rich points out at the end of the article, our firm is involved in other multi-million dollar matters at FINRA. In fact, we handled the Bayou v. Goldman FINRA arbitration case which generated a $20.6 million award, and is mentioned in the article. We think FINRA arbitration will continue to attract sophisticated legal disputes because it is more efficient and timely than court litigation.

Too Big for Their Britches?

Nate Raymond

The American Lawyer

12-01-2011

Just a few years ago, the Abbar family of Saudi Arabia could point to at least $383 million in investments managed by Citigroup Inc. Patriarch Abdullah Abbar and his son Ghazi had built the family fortune through an array of food import, travel, oil transport, and investment businesses. And beginning in 2006, they entrusted the bulk of their wealth to Citi.

Today the relationship has soured, and the money is almost gone. Both sides have lawyered up—the Abbars hired John Rich of Rich, Intelisano & Katz, and Citi retained Scott Edelman of Milbank, Tweed, Hadley & McCloy—and the legal battle is heating up. In August the Abbars filed a securities arbitration claim with the Financial Industry Regulatory Authority ­(FINRA), the U.S. securities industry's self-regulator. But while defendants often prefer the privacy arbitration affords, Citigroup wants to move the case into the courtroom.

The Abbar complaint is one of roughly 200 pending FINRA cases with at least $10 million at stake. The number of cases and the size of potential awards increased significantly after the stock market collapse in 2008. Before then, most FINRA cases involved small investors who were suing their brokers. But after the crash, richer investors flooded ­FINRA with claims that they were duped by large institutions. "The claims coming in now are substantially larger than what we had a few years ago," says Linda Fienberg, president of FINRA's dispute resolution unit.

The financial institutions, faced with hefty awards that are near impossible to overturn, have taken notice. Lawsuits by banks challenging the arbitrations are increasingly common, often contending that sophisticated investors are trying to twist FINRA's original definition of a brokerage customer to include their claims.

Established in 2007, FINRA is the result of a merger of two sets of self-regulatory organizations, the New York Stock Exchange's enforcement arm and the National Association of Securities Dealers. Cases number in the thousands annually, and currently 7,000 claims are pending, Fienberg says.

For most parties in FINRA cases, arbitration offers a quick and private venue to deal with securities claims. But the arbitration landscape changed when financial service firms began teetering. "There were some very large losses during that period," says Jonathan Harris, a commercial litigation partner at New York's Harris, Cutler & Houghteling.

Harris is counsel to Woodside, California, investment management firm Aurum STS Aggressive Trading LLC. During the fall of 2008, Harris and his cocounsel at Steptoe & Johnson contend that Société Générale breached agreements on warrants the bank issued to Aurum in 2003 and 2004, and unilaterally imposed new terms. Aurum filed an arbitration claim in June 2009 against SocGen, and in October a three-arbitrator panel awarded the company $61 million—the second-largest award this year. SocGen has said that it disagrees with the decision, but its lawyers at Latham & Watkins have not sought to vacate it.

Big awards like Aurum's have become more common in the wake of the subprime meltdown. Six of the ten largest securities arbitration awards were handed down during the last two years, according to Securities Arbitration Commentator Inc. In February 2009 FINRA awarded $406.6 million to ­STMicroelectronics N.V. in a fight with Credit Suisse Group AG, followed by a $80.8 million award to Kajeet Inc. against UBS AG in August 2010, and a $54.1 million payout to Colorado patent litigator Gerald Hosier and others in April 2011 over a squabble with Citigroup.

The largest award of 2011 involved options trading firm Rosen Capital Management LLC, which lost $90 million in fall 2008. Rosen's lawyers at Quinn Emanuel Urquhart & Sullivan blamed its prime broker Merrill Lynch & Co., Inc., which had placed ill-fated margin calls amid a crisis that had just weeks earlier thrown it into a government-brokered $50 billion sale to Bank of America Corporation. In July a three-arbitrator panel awarded Rosen $63.7 million. Merrill's lawyers at Wilmer Cutler Pickering Hale and Dorr moved in August to vacate the award.

Courts, though, rarely overturn arbitration awards. The Goldman Sachs Group, Inc. and its lawyers at Schulte Roth & Zabel unsuccessfully fought to vacate a $20.6 million FINRA award that resulted from the bank's alleged failure to detect fraud at the bankrupt hedge fund Bayou Group LLC. In November 2010 Manhattan federal district court judge Jed Rakoff denied Goldman's petition, saying that "having voluntarily chosen to avail itself of this wondrous alternative to the rule of reason, [Goldman] must suffer the consequences."

Banks are fighting over who is permitted to bring claims to ­FINRA. UBS's lawyers at Debevoise & Plimpton, with the backing of the Securities Industry and Financial Markets Association, argued that West Virginia University Hospitals, Inc., as an issuer, could not force the bank, as an underwriter, to arbitrate claims of more than $329 million in auction-rate securities. But in September the U.S. Court of Appeals for the Second Circuit rejected that narrow reading of who FINRA defines as a "customer."

In the Abbar case, Citigroup has similarly filed a lawsuit in Manhattan federal district court seeking to enjoin the arbitration. Milbank's Edelman, Citi's lawyer, declined to comment. But Citi in a statement says the Abbars were not clients of the U.S.–based broker-dealer Citigroup Global Markets Inc., so "their claims should not be subject to FINRA arbitration."

In the meantime, FINRA is adjusting to the bigger cases. In early 2012 it plans to implement a pilot program designed for cases with more than $5 million at stake, Fienberg says. The program, which will be tested in the Northeast and on the West Coast, will formalize the ways that FINRA ­allows parties to modify arbitration procedures. For example, parties could pick arbitrators who do not normally handle FINRA cases, such as former judges. Parties could agree to take depositions, which FINRA generally does not allow. And both parties would be able to pay arbitrators more than the $200 honorarium FINRA typically pays per hearing, a relief to some lawyers who worry about how the low pay might affect the complex cases.

And the Abbars' lawyer? Rich promises more cases from himself as well. "We have other multimillion-dollar cases in the works," he says. "This is not going to be an anomaly."
E-mail: nraymond@alm.com

Top Five Securities Arbitration Awards
Sanchez et al. v. Enrique Perusquia $429.5M
STMicroelectronics N.V. v. Credit Suisse Securities (USA) LLC 406.6M
Kajeet Inc. v. UBS Financial Services Inc. 80.8M
212 Investment Corp. et al. v. Myron Kaplan 74.8M
Rosen Capital Partners LPv. Merrill Lynch Professional Clearing Corp. 63.7M
Source: Securities Arbitration Commentator Inc.

Below is Bloomberg piece about our client's $383 million FINRA arbitration claim against Citigroup Global Markets, Inc. related to hedge funds, private equity, and derivatives.

Bloomberg

Citigroup Saudi Deal Haunts Pandit
By Donal Griffin - Nov 30, 2011

Saudi businessman Ghazi Abbar, who claims in an affidavit he lost $383 million of his family’s fortune on investments with Citigroup Inc., was sold one of the transactions even though the bank questioned his ability to properly manage them, according to an internal memo.

The memo, an exhibit in arbitration proceedings with the Financial Industry Regulatory Authority, warned that Abbar didn’t have the risk-management capability of the large hedge funds that were typical clients of the bank’s “hybrid” desk, which in 2006 was trying to persuade him to move his family’s money into complex derivative securities.

Soured deals struck with wealthy clients are haunting Citigroup Chief Executive Officer Vikram Pandit. Finra awarded $54 million in April to customers of the New York-based bank’s municipal-bond hedge funds, and in February, Brazilian investor Bernardo Valentini sued the bank, claiming he lost more than $24 million on derivatives Citigroup told him had “no risk of loss.”

“The case is a setback in Pandit’s vision of delivering financial services with a higher sense of responsibility to customers,” said David Knutson, a credit analyst with Legal & General Investment Management in Chicago. “As each issue bubbles up, analysts or providers of capital to the firm have to say, ‘OK, what other tape bombs are lying in the dusty lines of Citi’s balance sheet?’”
Citigroup’s Lawsuit

Citigroup denies Abbar’s allegations, saying in a lawsuit that he was a sophisticated investor who knew the risks when he turned over control of his hedge-fund investments to the bank in exchange for derivatives that mimicked their performance. The bank has sued its former client in federal court in Manhattan to block the arbitration, arguing Finra has no jurisdiction because the deals were handled outside the U.S.

Danielle Romero-Apsilos, a Citigroup spokeswoman, declined to comment further.

According to the Finra claim, Citigroup had never before sold the investment idea to individual investors like Abbar, 56, whose family made its fortune in Saudi Arabia importing food and building businesses linked to tourism, aviation, cold storage, ship bunkering and oil. The hybrid team, which also arranged loans when clients wanted to leverage their bets, made about $200 million for the New York-based bank in 2007, people familiar with matter said.

Based in Jeddah, a port city on the Red Sea about 50 miles from Mecca, the Abbars were among the largest merchants in Saudi Arabia, with annual revenue of about $500 million, according to the internal memo. Family members had served in senior positions under the kingdom’s late rulers, kings Faisal and Saud, according to the memo.
Pandit Meeting

Citigroup executives lined up to court Abbar, who oversaw the family’s investments, according to the Finra complaint. Pandit, 54, met with Abbar after joining Citigroup in 2007 as part of the company’s effort to maintain a relationship with the family. So did Chief Operating Officer John Havens, former wealth management boss Sallie Krawcheck and current global markets head Francisco “Paco” Ybarra, according to the complaint.

Abbar moved about $350 million of his family’s wealth to Citigroup from Deutsche Bank AG (DBK) in 2006, and Citigroup rewarded the banker who persuaded Abbar to make the shift, Mohanned “Ned” Noor, with a trip to Hawaii, according to the claim. Abbar was introduced to the hybrid desk, which was growing under Pandit’s predecessor, Charles “Chuck” Prince. Prince was trying to boost revenue by taking more trading risk.
Burns, Mathur

The hybrid group was run by Richard Burns, a London-based Citigroup veteran, according to two people familiar with the group who asked not to be named because they aren’t authorized to speak about the matter. Burns oversaw structuring and trading of hybrid derivatives, securities whose values are tied to different kinds of underlying assets. Samir Mathur was head of hybrid trading for the group.

Abbar wanted a “simple loan structure” to finance some of the family’s hedge-fund investments, he claims. Over meals in restaurants in London and New York, the hybrid team persuaded Abbar to instead transfer control of some of those assets to Citigroup, according to one of the people familiar with the matter. The desk then created the hybrid derivative that would mimic the performance of those funds.

Abbar claims he invested $383 million in the product and a separate private-equity financing deal, which included funds he injected after his initial transfer from Deutsche Bank. Both transactions collapsed after markets plunged in late 2008.
Tiger Management

Abbar had more experience with hedge funds than most. He began investing his family’s fortune after he graduated with a master’s degree in business administration from Harvard University in 1978. He built close relationships with hedge-fund managers such as Julian Robertson of Tiger Management LLC and joined the board of one of the Tiger funds in 1997, according to Fraser Seitel, a spokesman for Tiger Management. Abbar said he also had relationships with Stephen Cohen, founder of SAC Capital Partners LP, billionaire Paul Tudor Jones and Louis Moore Bacon.

Still, as an individual, he was an unusual client for the desk, which typically dealt with large hedge funds and so-called fund of funds firms that make bets on other investment funds. Customers included Man Group Plc (EMG), the world’s biggest hedge fund; Tudor Investment Corp., Tudor Jones’s hedge fund; and Saudi Arabian financial-services firm Saad Group, according to the people familiar with the matter. Abbar didn’t have those firms’ resources, the bank said in the memo.
Operates ‘Alone’

“The Client is not like the typical fund of funds client the desk is used to dealing with,” according to the memo. “The Client does not maintain the extensive risk, due diligence and operational infrastructure that exists at most of the larger fund of funds. While Ghazi is experienced with alternative investments, he operates more or less alone with advice from his friends and industry contacts.”

Abbar’s lack of risk management concerned some Citigroup executives before he bought the product, according to one person familiar with the deal. Members of the hybrid desk concluded that his financial experience gave him the ability to manage the risks, and the bank approved the deal.

“Ghazi has the ability to understand the risks and rewards of the transactions,” Citigroup wrote in the internal memo.

After the deal went through, members of the hybrid team were encouraged to sell similar products to other wealthy individuals, according to the person, who didn’t want to be named because the matter is private.
Hedge Funds

Abbar’s hedge-fund investment collapsed in 2008 as Lehman Brothers Holdings Inc. failed and funds around the world plunged. The Eurekahedge Hedge Fund Index dropped almost 12 percent in the second half of the year, Bloomberg data show. Many investors who used derivatives to multiply their bets were wiped out, according to Satyajit Das, author of “Extreme Money: Masters of the Universe and the Cult of Risk” (FT Press, 2011).

The leverage used to increase derivatives bets “is like playing Russian roulette with six bullets in the chamber,” said Das, who isn’t familiar with Abbar’s case.

The failed investments erased the “considerable family wealth” the Abbars had placed with the bank and damaged relationships within the family, according to the claim. Citigroup now stands to gain $70 million as it sells off the hedge-fund assets at the center of the product, Abbar alleges.
‘Nuclear’ Products

“A lot of these highly leveraged, highly structured products, I analogize them to nuclear power,” said John Lovi, an attorney with Steptoe & Johnson LLP who handles cases involving derivatives and isn’t involved in the Abbar case. “There’s no doubt that it’s complicated and you better have your best and brightest on it and be watching it closely because when it goes bad, it goes really bad.”

The collapse of the deal came as Citigroup itself was posting record losses caused by the financial crisis and its investments in collateralized debt obligations, another form of derivative. The bank lost a total of $29.3 billion in 2008 and 2009 and took a $45 billion taxpayer bailout. Senior executives allowed their hunt for more revenue to eclipse proper risk management, according to a 2008 Federal Reserve Bank of New York inspection report.

Pandit, who took the top job in December 2007, disbanded part of the hybrid team in 2008 and began to wind down the structuring side of the business, the people said. He has since begun an effort to convince investors that the bank’s culture has changed to one of “responsible finance.”
New Team

“We have a new management team, a new governance structure,” Pandit said in a video on the bank’s website, called new.citi.com. “We’re completely focused around the client. Each and every one of our businesses is structured and always thinks about what is it that my clients need and how do I make sure I deliver all of Citi to each and every one of my clients.”

Citigroup advanced $1.44, or 5.7 percent, to $26.68 at 10:46 a.m. in New York trading. The shares slid 47 percent this year through yesterday, compared with a 32 percent drop in the 24-company KBW Bank Index. (BKX)

Abbar is seeking $383 million. The largest award ever granted by Finra was $406.6 million for STMicroelectronics NV against Credit Suisse Group AG (CS) in 2009, according to Finra records.

Citigroup was on the wrong side of the largest award for individual investors in April, when Finra ruled in favor of a group of wealthy, Aspen, Colorado-based customers’ $54 million claim, the records show. The clients said Citigroup misled them about the level of risk tied to investments in the bank’s municipal-bond hedge funds.
‘Guaranteed’ Investment

In a suit brought in Manhattan federal court, Brazilian client Bernardo Valentini claims he lost more than $24 million on derivatives the bank told him were “guaranteed.” He was convinced of the merits of the deal by two Citigroup private bankers, who visited his office in Curitiba and said they “wanted to get to know him,” he said in the court filings. Citigroup denied the allegations.

Banks that sell complex derivatives to wealthy customers often face complaints when the deals don’t work out as planned, said Das, the banker turned author.

“Clients are always good winners,” Das said. “The moment they lose money, they suffer a 100-point drop in IQ.”
Food Imports

Today, Abbar runs the largest of the family’s businesses, Abbar Cold Stores, which imports frozen foods, fresh fruits and cheeses into Saudi Arabia, according to John Rich, an attorney in New York with Rich, Intelisano & Katz LLP, which represents the family.

Some of the executives mentioned in the case have since left Citigroup, including Ned Noor, the Geneva-based private banker who persuaded Abbar to move his money to the bank in the first place. He declined to comment on Abbar’s claims.

Richard Burns and Samir Mathur continue to work in derivatives for Citigroup. They also declined to comment.

The Abbar case is Citigroup Global Markets Inc. v. Abbar, 11-CV-6993; the Valentini case is Valentini et al v. Citigroup Inc. (C) et al, 11-CV-01355. Both cases are in U.S. District Court, Southern District of New York (Manhattan).

Below is an On Wall Street piece about our firm's representation of a Saudi investor in a $383 million FINRA arbitration against Citigroup Global Markets, Inc.

Citigroup Aims to Stop Arbitration From Proceeding
By Lorie Konish, On Wall Street
October 7, 2011

A new lawsuit filed by Citigroup Global Markets Inc. this week against a set of Saudi family investors with a $383 million claim against the firm will determine whether that case can proceed to arbitration.

Citigroup’s suit, dated Oct. 5, is aimed at putting a stop to the arbitration case filed with the Financial Industry Regulatory Authority in August by Abdullah Abbar and Ghazi Abbar, father and son Saudi nationals.

Citigroup claims that the Abbars were not clients of the U.S.-based broker-dealer Citigroup Global Markets Inc., which was named in the arbitration suit the pair filed with the Financial Industry Regulatory Authority in August. Instead, the private equity and hedge fund investments cited in the arbitration—investments the Abbars took part in during the years 2006 and 2007—came from Citigroup entities in the Cayman Islands, Switzerland and United Kingdom, the firm said.

Those entities are not subject to FINRA rules because they are located outside of the United States.

"We are confident this matter will be appropriately resolved when it is reviewed by legal authorities in the jurisdictions that the parties agreed to when they executed their trades,” Citigroup Spokeswoman Natalie Marin stated via email on Wednesday. “Because Citigroup Global Market Inc. was not a party to the trades in question and because the claimants were not customers of Citigroup Global Markets Inc., their claims should not be subject to FINRA arbitration."

But the Abbars, who are represented by New York-based law firm Rich & Intelisano LLP, disagree. The next step will probably be an oral argument over whether there should be a temporary restraining order stopping the arbitration, Ross B. Intelisano, a partner with the law firm, said.

“If we win in arguing to the Southern district that the arbitration should go forward, then the arbitration will go forward or Citigroup may appeal up to the Second Circuit,” Intelisano said. “If we win that, then we’ll have an arbitration.”

Intelisano plans to fight Citigroup’s claims based on the fact that the New York entity and its employees were the ones that sold the Abbars the investments. “We’re arguing that they’re attempting to evade their regulatory responsibility as a registered brokerage firm to arbitrate these disputes if the customer chooses to do so,” Intelisano said.

Clients who bring cases to FINRA also have the option of resolving disputes through mediation.

Another recent case, including UBS AG versus a West Virginia hospital, also called into question the definition of a customer and if a case can proceed to arbitration, Intelisano said. That case was ultimately sent to arbitration.

If the Abbars’ arbitration proceeds, the case will address their initial claims that misconduct by Citigroup Global Markets and its employees “virtually wiped out” the Abbars fortune that totaled about $350 million as of 2005, their August claim said.

The Abbars’ fortune came mostly from food products importing, as well as other businesses including oil investments and travel and tourism. Most of those assets were invested in hedge funds, with other investments in real estate trusts, private bond issues, private equity, public equities and bonds, real estate trusts and venture capital.

The family was wooed to work with Citigroup after a financial advisor they were working with at Deutsche Bank joined that firm. By luring the Abbars to Citigroup, that banker became a top private banker at the firm and the Abbars became one of the firm’s top ten international clients, according to the Abbars’ arbitration filing.

The investments cited in the arbitration dispute include two leveraged option transactions that had a leveraged exposure to multiple hedge funds, as well as another private equity transaction involving a unit trust and related loan.

"The crux of our case is that Citigroup sold a very, very complex product to a wealthy family that was really not appropriate for a non-institutional client," Intelisano said. "Citigroup had previously only sold these complex structures to funds of funds and hedge funds prior to selling it to our clients."

After banks and brokerage firms began selling complex derivative products to individuals and families in addition to the institutions they were originally targeted for around 2006 and 2007, more cases like this could crop up, according to Intelisano.

"I think you will see other cases filed involving retail investors who were improperly sold inappropriate institutional products by banks worldwide,” Intelisano said.

Below is a story about CGMI's attempt to stay a $383 million FINRA arbitration filed by our firm related to inappropriate behavior with respect to derivatives, hedge funds, and private equity transactions.

Oct. 6 (Bloomberg) -- A Citigroup Inc. unit sued two Saudi investors seeking to block Financial Industry Regulatory Authority arbitration of their $383 million claim that the bank “wiped out” their family’s wealth.

Abdullah and Ghazi Abbar, a father and son from Jeddah who put family money into hedge funds, have no customer agreements or accounts with Citigroup Global Markets Inc., a New York-based broker dealer that they blame for mismanaging their family’s life savings, according to a complaint the Citigroup unit filed yesterday in federal court in Manhattan.

The Citigroup entities that handled two leveraged option transactions and a private-equity loan for the Abbars are based in the U.K., Switzerland and the Cayman Islands and aren’t subject to arbitration by Finra, a Washington-based brokerage regulator, according to the complaint.

“We are confident this matter will be appropriately resolved when it is reviewed by legal authorities in the jurisdictions that the parties agreed to when they executed their trades,” Natalie Marin, a spokeswoman for New York-based Citigroup, said in an e-mail.

John Rich, an attorney for the Abbars, didn’t immediately return a voice-mail message left after regular business hours seeking comment on the lawsuit.

The Abbars, whose money comes from food products importing, travel and tourism, oil investments and other businesses, were courted by top bank officers, including Chief Executive Officer Vikram Pandit and former global wealth management chief Sallie Krawcheck, to maintain or expand business with the New York- based company, they said in their Finra claim.

‘Gross Misconduct’

“Due to a pattern of gross misconduct by CGMI and its employees and affiliates, from late 2005 to present, the considerable family wealth which the Abbars entrusted to Citigroup has been virtually wiped out,” the Abbars said in the claim they filed with Finra on Aug. 17.

The Abbars said their family was lured to Citigroup in 2006 after their Deutsche Bank AG banker moved to Citi Private Bank Geneva. The Abbars put $343 million of their hedge fund investment assets into a leveraged option swap transaction to which Citigroup’s London affiliate was a last-minute counterparty, a move designed to shield the bank from U.S. regulatory and legal obligations, according to the claim.

Voting Shares

As part of the hedge-fund financing transaction, Citigroup Global Markets had all the voting shares of the entities that held the family’s investments. The bank failed to monitor the investments, which became over-leveraged and totally collapsed in late 2008 when the full force of the financial crisis hit, the Abbars alleged.

“Citigroup took over management of the remaining positions in the hedge fund portfolio and put in place a program for redeeming the entire portfolio,” they said in the Finra claim. “Citigroup will unjustly benefit in the amount of approximately $70 million from redemption of such investments after repayment of the loan and interest.”

The Abbars also set up a credit facility with Citigroup under Cayman law providing for loans of as much as $110 million and were persuaded to use the facility to invest in bank-related private-equity investments. The Citigroup entities involved in the day to day management of the credit deal “were ultimately responsible” to Finra-registered personnel in New York, they said in the claim. They said the credit structure eventually collapsed because of borrowings related to the Citigroup investments.

The Abbars seek damages of $147 million in connection with a credit facility that was set up to pay for capital calls in the family’s private-equity investments. They are also seeking $198 million tied to the hedge fund transaction and recovery of $38 million they injected into the Citigroup deals, according to their claim.

The case is Citigroup Global Markets v. Abbar, 11-6993, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Donal Griffin and Bob Van Voris in New York. Editors: Peter Blumberg, Andrew Dunn

Sophisticated investors won a $54 million arbitration award against Citigroup Global Markets Inc. related to the MAT leveraged municipal arbitrage hedge fund. It is by far the largest FINRA award rendered against Citi related to MAT. The award in the matter named Hosier v. Citi also includes $17 million in punitive damages and $3 million in attorneys' fees.

We have been retained by many MAT investors and have numerous pending arbitrations against Citi related to MAT and it's sister fund Falcon. This award is a potential game changer.

It'll be interesting to see if Citi attempts to move to vacate the award in court, especially due to the punitive damages amount. It is very difficult to vacate an arbitration award, however firms have been more aggressive in challenging arbitration awards in recent years. Either way, this is one of the largest arbitration awards ever rendered against a broker dealer at FINRA and a tremendous sign for MAT/Falcon investors with outstanding claims.

Below is a link to the award on FINRA's web site.

http://finraawardsonline.finra.org/viewdocument.aspx?DocNB=45768

A Florida FINRA panel awarded $6.4 million to an investor in Citi's MAT municipal bond arbitrage fund this week. It's the largest award rendered against Citi related to its MAT and Falcon proprietary fund blow-ups. The case is Berghorse v. Smith Barney (FINRA 08-04466). Although damages claimed on the award were $12 million, sources say the net out of pocket losses were under $10 million, making the award amount over 64% of the losses. The 29 hearing sessions also make it the longest MAT arbitration to date. This substantial award follows a string of 100% NOP awards rendered against Smith Barney late last year. Below is an On Wall Street piece about the case.

FINRA: Citi To Pay Investors $6.4M
By Lorie Konish
February 9, 2011

A Financial Industry Regulatory Authority panel has ordered two parts of Citigroup Inc. to pay $6.4 million to make up for investment losses tied to a group of troubled municipal arbitrage trust funds.

The $6.4 million award is about half of the compensatory damages requested by the claimants, led by investment banking executive D. Theodore Berghorst, who sought no less than $12 million for costs, attorneys’ fees, rescission and other expenses.

“It’s the largest award to date,” said Ross B. Intelisano, a partner at Rich & Intelisano LLP, a New York law firm handling other cases involving Citigroup’s proprietary MAT and Falcon hedge funds. “I think it’s because of the size of the claim. It’s also the largest in size that’s been tried all the way to a full award.”

FINRA’s decision caps off a string of awards in the last few months related to those Citigroup funds, Intelisano said, while the 29 hearing sessions for this case was longer than most.

The respondents in the cased include Citigroup Global Markets Inc., operating under the name Smith Barney, and Citigroup Alternative Investments LLC. The claim is related to a group of funds, MAT Finance LLC, short for municipal arbitrage trust.

Those funds, which underwent severe losses during the financial downturn, have also come under investigation by the Securities and Exchange Commission after investors charged that the brokers selling them did not fully disclose their risks, The Wall Street Journal reported in November. The MAT funds were modeled to reap gains by investing in long-term bonds, but reportedly suffered around 80% in losses around 2008.

“We neither confirm nor deny the existence or non-existence of investigations,”

SEC Spokesman Kevin Callahan said regarding the reported investigation of the funds.

The claimants in the case, which was first filed in November 2008, alleged fraud, fraudulent misrepresentations, negligent misrepresentation, breach of fiduciary duty, negligence, breach of contract, and violation of the Florida Securities and Investor Protection Act, among other rules.

The list of claimants include D. Theodore Berghorst, chairman and chief executive of Vector Securities LLC, a health care-focused merchant and investment banking firm; Berghorst Snowbird LLC; Berghorst 1998 Dynamic Trust and Vector Managed Holdings.

With the award decision, Citigroup will pay $6.4 million excluding interest to the claimants. Of that sum, Citigroup Global Markets will pay 75%, while Citigroup Alternative Investments will be responsible for the remaining 25%. The FINRA panel denied the claims related to the Florida statues, citing a lack of proof.

“We disagree with the decision,” Citi Spokesman Alexander Samuelson said.

Berghorst was not available for comment by press time.