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SEC probes whether Citi misled investors over debt fund

The US Securities and Exchange Commission (SEC) is probing whether Citigroup Inc misled investors about the risk level of some of soured debt funds, says a media report.

business Updated: Nov 08, 2010 15:56 IST

The US Securities and Exchange Commission (SEC) is probing whether Citigroup Inc misled investors about the risk level of some of soured debt funds, says a media report.

The Securities and Exchange Commission has also subpoenaed Citi's former in-house brokers for testimony, according to The Wall Street Journal.

"SEC investigation of soured Citi debt funds has subpoenaed former in-house brokers, some of whom contend the bank misled investors about how risky the funds were," the report noted, citing people familiar with the matter.

Citi's debt funds, which are under the SEC's investigation, had used borrowed money to invest in municipal bonds. After the mortgage market crumbled starting in mid-2007, the funds' value fell about 77 per cent to a low in March 2008, the report noted. A storm of protest from brokers and clients ensued, and Citi, following an internal debate, offered share buybacks that reduced investor losses to about 61 per cent, it added.

Three brokers who worked in California for Smith Barney, then a Citi unit, concluded the bank had not adequately disclosed the funds' risks and also mismanaged them, the daily noted.

The California brokers, who resigned in 2008 in a dispute over Citi's handling of the funds, had received subpoenas from SEC and they spoke to the SEC in 2009 and again this past summer. According to the publication, the SEC declined to comment and Citi officials also declined to comment in detail, citing the regulatory probe. However, Citi denies misleading investors, saying its disclosure was adequate because investors had been put on notice the funds were more volatile than the stock market and that they could lose their entire investment.