The WSJ reports that the Securities and Exchange Commission [SEC] has investigated certain Citigroup Inc. (C) debt funds to assess whether the New York – based firm made adequate disclosure to investors about the funds’ risk levels.
According to the Journal, the SEC had also subpoenaed the bank’s former brokers for testimony, some of whom contend the bank, which used borrowed money to invest in municipal bonds and mortgage debt, misled investors about how risky the funds were.
Apparently, Citi’s preference on using these specialized funds was based on the fact that fee ratios on debt funds, which invest mainly in debt instruments like govt bonds, corporate bonds, debuntures etc., are lower, on average, than equity funds because the overall management costs are lower. After the mortgage market imploded during the credit crisis, the funds’ value nosedived nearly 80 percent to reach a low in March 2008, the paper said.
Following a storm of protest from brokers and clients, Citigroup, notes the Journal, offered share buybacks that reduced investor losses to about 61%.
Three California-based brokers, who worked for the then Citigroup unit Smith Barney, concluded the bank did not adequately disclose the funds’ risks and had also mismanaged them, the newspaper said, citing people familiar with the regulatory probe.
Share Action: Shares of Citi are lower on the session by 0.67%, currently trading at $4.46.