Citigroup Inc. (C) has been fined $54.1 million in a municipal hedge fund case. The company has been ordered by an arbitration panel of the Financial Industry Regulatory Authority to pay two individual investors $34.1 million in compensatory damages for their losses over several municipal bond hedge funds during the financial crisis. Additionally, Citi also faces fines of $17 million in punitive damages and $3 million in legal fees and other costs.
The two individual investors, Jerry Murdock Jr. and Gerald Hosier, had suffered huge losses in municipal bond hedge funds that were launched by Citigroup Global Markets Inc. They had filed for claims in mid 2009 for such losses.
It was alleged that Citi had misled investors regarding risks involved with such funds, which were said to be much more risky than what Citi had projected while marketing. The funds in question are also subject to a Securities and Exchange Commission investigation.
Citi is, however, disappointed with the decision and believes that it is not supported by facts or law and is in fact considering its options.
Citi is not the only company to be penalised so heavily and asked to pay such a hefty amount to individual investors under arbitration procedures. In 2006, Ameriprise Financial Inc. (AMP) was ordered to pay $20.2 million to a group of individuals for some issues related to variable annuities and mutual funds sale.
We believe that such penalization is good news for investors who suffered significant losses due to misleading activities and misrepresentations of companies related to investment risks. However, such fines tarnish a company’s reputation and put its financials at stake.
Citi currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Considering the stock fundamentals we also have a “Neutral” recommendation.
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