BUSINESS

Citigroup Ordered To Pay Investors $54M For Losses From Muni Securities

04/12/2011 05:01 pm ET | Updated Jun 12, 2011

NEW YORK, April 12 (Joseph A. Giannone) - An arbitration panel ordered Citigroup Inc (C.N) 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 -- filed in June 2009, seeking $48.2 million of damages plus other relief related to their losses on three municipal bond arbitrage funds and three ASTA Finance funds sold by Citigroup Global Markets brokers.

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 hearing 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.

The strategy backfired when credit markets broke down in 2007, leaving investors with losses of as much as 80 percent.

These funds, which were marketed as alternatives to municipal bond funds, are the subject of a U.S. Securities and Exchange Commission probe, and have cost Citi dearly across a number of 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 12 out of 13 Citigroup MAT cases and have recovered $70 million.

Citi's shares were up a penny at $4.54 in afternoon trade.

There is no guarantee the panel's decision will be final.

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 and Gerald E. McCormick)

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