Seven Norwegian municipalities along with Terra Securities, a Norwegian securities brokerage firm, filed a lawsuit last year against Citigroup for tens of millions of dollars in losses after recommendations to invest in two highly complex and risky Citigroup hedge funds known as ASTA and MAT. Investors alleged that the instruments were falsely marketed and sold as low-risk, conservative securities.
According to the complaint, the municipalities say they were duped by Citigroup because the bank failed to warn them that the structured notes in question were highly risky and subject to being cashed out, at a significant loss, if the market price dropped below a certain point.
As in the case of Citigroup’s ASTA/MAT hedge funds, the returns on the investments bought by the Norwegian towns were linked to a municipal bond arbitrage fund created by Citigroup. The fund involved leveraged investments in United States municipal bonds. The investments themselves were highly speculative and included collateralized debt obligations and mortgage-backed securities. In addition, the leverage associated with the fund created added risks- something the Norwegian towns, just like ASTA/MAT investors, were unaware of until it was too late.
By May 2008, nearly all the Norwegian towns’ original investment in the Citigroup notes was wiped out. Meanwhile, Terra Securities found itself forced into bankruptcy. Court documents in the case accused Citigroup of selling the notes “in order to unload what was becoming significant risk from either its own or its preferred customers’ balance sheets.”
In addition to Citigroup, the lawsuit, which was filed in the United States District Court for the Southern District of New York, also named Citigroup Global Markets and Citigroup Alternative Investments LLC as defendants.
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