Hedge Fund Bars Investors from Making Withdrawals

The actions of megabank Citigroup have left investors reeling after they were barred from withdrawing their money in one of the bank’s hedge funds.

A front-page story in the Wall Street Journal (Feb. 15, 2007, edition) reported that Citigroup suspended redemptions in one of its hedge funds, CSO Partners, which specializes in corporate debt. CSO was closed for withdrawals after investors tried to pull more than 30 percent of the fund’s $500 million of assets. In an effort to stabilize the fund, Citigroup injected it with $100 million last month.

In 2007, CSO reported a year-end loss of 11 percent. John Pickett, the hedge fund’s former manager, resigned from Citigroup in December 2007, following a run-in with senior management and complaints that he committed more than half of the fund’s assets to buy leveraged loans offered by a banking consortium on behalf of a German media company.

The banks provided CSO with loans totaling more than $730 million. Pickett later tried to renege on the deal, contending the consortium had altered the loan terms. At the same time, the markets were responding to the credit crisis, and the value of the loans began to erode. If CSO could not cancel the deal, its performance ultimately would suffer.

The matter was settled in December 2007. Citigroup agreed to a proposal whereby CSO would buy $746 million of the loans at face value, even though the loans were trading at 86 percent to 93 percent of face value. In addition, the banks’ legal fees were paid by Citigroup.