In an April 12, 2011, article from InvestmentNews.com states that Citigroup Inc., the third-biggest U.S. bank, was ordered to pay more than $51 million to a group of investors in its MAT and ASTA municipal-bond hedge funds, which regulators began examining more than two years ago.

The Financial Industry Regulatory Authority arbitrators, which oversees U.S. brokerages, includes $17 million in punitive damages, according to a copy of the panel’s decision on Finra’s website. It’s the third-largest arbitration award by Finra and predecessor NASD since 1988, according to Securities Arbitration Commentator Inc., a Maplewood, New Jersey-based legal publishing and research firm.

The SEC or U.S. Securities and Exchange Commission has questioned former Citigroup brokers as part of a probe into whether the bank misled investors about risks associated with certain debt funds, people familiar with the matter said last year. Citigroup disclosed the inquiry into the MAT and ASTA funds in August 2008, after the funds tumbled to values ranging from 10 cents to 60 cents on the dollar amid souring credit markets early that year.

“We are disappointed with the decision, which we believe is not supported by the facts or law, and we are reviewing our options,” Danielle Romero-Apsilos, a spokeswoman for the New York-based bank, said in an e-mailed statement.

The FINRA arbitrators didn’t explain the reasoning behind their ruling. They ordered Citigroup to pay $21.7 million to patent attorney Gerald Hosier, $8.5 million to Brush Creek Capital LLC, which is owned by Hosier’s family, and $3.9 million to venture capitalist Jerry Murdock Jr., the ruling shows. Among their claims, plaintiffs had accused the bank of breaching a fiduciary duty, contract violation, fraud, breaking Finra rules and supervisory failures.

It was noted in the InvestmentNews.com article that Citigroup said in a regulatory filing last month that “several” investors in funds including MAT and ASTA had filed lawsuits and arbitration claims against the bank, and that many of the disputes are already resolved. The SEC is examining the marketing, management and accounting treatment of the funds, the company said, adding that it is fully cooperating.

If you feel you have been an alleged victim of  Citigroup, Inc., or it’s brokers, or you have found yourself in a similar situation, call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Huge segments of the Auction-Rate Securities (ARS) market provided financing for a wide array of municipal entities. How could those municipal entities receive financing when the ARS market froze? Reports indicate that bank letters of credit (LOCs) provided ongoing financing for many municipal borrowers. Now what?

When those LOCs begin rolling off, banks are extremely reluctant to roll them forward and impending default is staring many of these municipal borrowers right in the face. The capital markets are not anxious to provide liquidity and banks are equally reluctant. Thus while the Federal Reserve throws support behind many market segments, the municipal market has retraced back to levels last seen in early 2009.

The Wall Street Journal sheds light on this dislocation within the municipal market in writing, ‘New Hit to Strapped States,’

“With the market for municipal bonds tumbling, citi (C: 5.13 +0.09 +1.79%)es, hospitals, schools and other public borrowers are scrambling to refinance tens of billions of dollars of debt this year, another sign that the once-safe market is under duress.

The muni bond market was hit with the latest wave of bad news Thursday, prompting a selloff that sent the market to its lowest level since the financial crisis. A New Jersey agency was forced to cut the size of a bond issue by about 40% because of mediocre demand, and pay a higher rate than expected. And mutual fund giant Vanguard Group shelved plans for three new muni bond funds, citi (C: 5.13 +0.09 +1.79%)ng market turmoil.

Yields on 30-year triple-A rated general obligation bonds shot higher to 5.01% on Thursday, reflecting a spike in perceived risk, according to Thomson Reuters Municipal Market Data. The last time those bonds yielded 5% was Jan. 30, 2009, during the financial crisis.

Amid the selloff, public borrowers such as states and utilities face a wave of refinancing stemming from deals cut mostly during the crisis. The deals involved letters of credit from banks that were designed to keep financing costs down for government entities in need of cash.

Though the financing deals can be meant to last decades, the letters of credit underpinning them are expiring sooner. That could force the borrowers in many cases to pay higher interest rates or seek guarantees at higher costs. For the weakest borrowers, new guarantees may not be available and refinancing too costly. There are about $109 billion worth of letters of credit and similar guarantees expiring this year, according to Bank of America Merrill Lynch. Some $53 billion in letters of credit alone is expiring this year, according to Thomson Reuters.

“Municipalities may be hard-pressed to come up with this money or refinance this debt,” said Eric Friedland, a municipal analyst at Fitch Ratings. The ratings firm is scouring to identify risks among weaker municipalities that are seeking to renew these deals, and says it could downgrade some.

The rollover rush stems from the credit crisis that roiled the U.S. in 2008. Municipalities had issued so-called auction-rate securities, instruments whose rates reset at weekly auctions. Amid the credit crunch, buyers at these auctions vanished.”

These ARS markets not only scammed investors but in the process provided financing to entities at interest rate levels which did not appropriately price the inherent level of risk. That fact is now coming to light and investors are responding rationally in forcing these borrowers to pay higher rates to gain financing.

Do you feel you were alledgedly scammed in the ARS market?  You may have legal rights to recover your money from the broker or brokerage firm that sold you your issue of Auction Rate Preferreds. To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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Washington, D.C., Dec. 7, 2010 — Today, the Securities and Exchange Commission  charged Banc of America Securities, LLC (BAS) with securities fraud for its part in an effort to rig bids in connection with the investment of proceeds of municipal securities.

Banc of America Securities, LLC, (BAS) has agreed to pay more than $36 million in disgorgement and interest. BAS and its affiliates have also agreed to pay another $101 million to other federal and state authorities for its conduct.

“This ongoing investigation has helped to expose wide-spread corruption in the municipal reinvestment industry,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “The conduct was egregious — in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper.”

The SEC found that the bidding process was not competitive because it was tainted by undisclosed consultations, agreements, or payments and, therefore, could not be used to establish the fair market value of the reinvestment instruments. As a result, these improper bidding practices affected the prices of the reinvestment products and jeopardized the tax-exempt status of the underlying municipal securities, the principal amounts of which totaled billions of dollars.

Also, when investors purchase municipal securities, the municipalities generally invest the proceeds temporarily in reinvestment products before the money is used for the intended purposes. Under relevant IRS regulations, the proceeds of tax-exempt municipal securities must generally be invested at fair market value. The most common way of establishing fair market value is through a competitive bidding process, whereby bidding agents search for the appropriate investment vehicle for a municipality.

In the Commission’s Order, it was stated that certain bidding agents steered business from municipalities to BAS through a variety of mechanisms. In some cases, the agents gave BAS information on competing bids (last looks), and deliberately obtained off-market “courtesy” bids or purposefully non-winning bids so that BAS could win the transaction (set-ups). As a result, BAS won the bids for 88 affected reinvestment instruments, such as guaranteed investment contracts (GICs), repurchase agreements (Repos) and forward purchase agreements (FPAs).

According to the Order, in return, BAS steered business to those bidding agents and submitted courtesy and purposefully non-winning bids upon request. In addition, those bidding agents were at times rewarded with, among other things, undisclosed gratuitous payments and kickbacks. The Commission also found that former officers of BAS participated in, and condoned, these improper bidding practices.

It was also noted that BAS is now known as Merrill Lynch, Pierce, Fenner & Smith Incorporated following a merger.

Elaine C. Greenberg, Chief of the SEC’s Municipal Securities and Public Pensions Unit, added “This conduct threatened the integrity of the municipal marketplace, affecting not only the municipal issuers who were directly defrauded, but also the thousands of investors nationwide who purchased their tax-exempt municipal securities.”

Without admitting or denying the SEC’s findings, BAS consented to the entry of a Commission Order which censures BAS, requires it to cease-and-desist from committing or causing any violations and any future violations of Section 15(c)(1)(A) of the Exchange Act of 1934, and to pay disgorgement plus prejudgment interest totaling $36,096,442 directly to the affected entities.

Noted also was that in determining to accept BAS’ offer, which does not include the imposition of a civil penalty, the Commission considered the cooperation of and remedial actions undertaken by BAS in connection with the Commission’s investigation as well as investigations conducted by other law enforcement agencies. Among other things, BAS self-reported the bidding practices to the Antitrust Division of the Department of Justice.

The Commission also barred Douglas Lee Campbell, a former officer of BAS, from association with any broker, dealer or investment adviser, based upon his guilty plea to a criminal information on Sept. 9, 2010, in United States v. Douglas Lee Campbell (Criminal Action No. 10-cr-803) charging him with two counts of conspiracy and one count of wire fraud. The criminal information charged, among other things, that Campbell engaged in fraudulent misconduct in connection with the competitive bidding process involving the investment of proceeds of tax-exempt municipal bonds. The Commission is not imposing a civil penalty against Campbell based on his cooperation in the Commission’s investigation.

This information was obtained from the SEC’s website.  The SEC’s investigation is continuing.

If you feel you are a victim of these alleged fraudulent schemes of  Banc of America Securities, LLC, BAS, now known as Merrill Lynch, Pierce, Fenner & Smith Inc., call a Securities Arbitration Lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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The 1861 Capital Management Funds collapsed in February 2008, and  resulted in devastating losses to it’s investors.

Municipal bond arbitrage is considered a very complicated, risky investing strategy that involves trades of municipal bonds, short-term notes, and interest-rate derivatives. In recent years, a growing number of hedge funds, including 1861 Capital Management, began to employ municipal arbitrage, buying long-term municipal bonds that had slightly higher yields and pocketing the difference. The funds then hedged against large fluctuations in interest rates by essentially reversing that trade, using taxable securities. 

Municipal bond arbitrage also entails additional risks because in order to bolster returns, hedge funds must pile on the leverage.

So signs of trouble first appeared at the beginning of 2008, when municipal bond yields became hammered from the downturn in the markets. As a result, many hedge funds suddenly found themselves forced to liquidate their leveraged positions. 

These two facts – risk and leverage – that have become a bone of contention for many investors in municipal arbitrage hedge funds. As reported in a January 2009 study from the Securities Litigation and Consulting Group (SLCG) on the recent failure of leveraged municipal bond hedge funds, some 36 hedge funds – 1861 Capital Management among them – were marketed and sold to investors as “high yield, low-risk alternatives” to traditional municipal bond funds.

Nothing could have been further from the truth. All of the hedge funds featured in SLCG’s study contained considerably more risk than investors ever realized. They also produced significantly lower-than-expected returns. In the end, investors suffered to the tune of billions of dollars in losses.

It is believed that UBS sold the following fixed income arbitrage funds: 1861 Capital Municipal Enterprise Domestic Fund, LP, 1861 Capital Municipal Enterprise Offshore Fund, Ltd., 1861 Capital Discovery Domestic Fund, LP, and 1861 Capital Discovery Offshore Fund, Ltd.

Other securities brokerage firms, including UBS, misrepresented the 1861 Capital Management Funds as safe and secure fixed income products that were particularly suitable for retirees and the elderly, and failed to adequately disclose the true speculative nature and substantial risks inherent in these investments.

Hedge funds like 1861 Capital Management and ASTA/MAT were marketed by many brokers to investors as high-yield, more conservative alternatives to money-market fund or traditional municipal bonds. In reality, this was far from the truth. Not only is leveraged municipal bond arbitrage at the opposite end of conservative, but it also can produce lower-than-expected returns for investors and bring considerably more risk.

If you are a victim of the alleged fraudulent schemes of  your agent or broker, in particular USB, regarding the ASTA/MAT, 1861 Capital collapse, or any fraudulent sale of hedge funds through any of its agents, call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC., representing investors nationwide before FINRA and the NFA.

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Main Street Natural Gas Bonds, a financing vehicle of the Municipal Gas Authority of Georgia, were sold by many Wall Street brokerages as safe and conservative municipal bonds. However, the bonds were complex derivative securities backed by Lehman Brothers. When Lehman filed for bankruptcy in September 2008, the value of the Main Street Bonds plummeted.

The investors of Main Street Natural Gas Bonds are now claiming that not only did their brokers not disclose the risk associated with investing in the bonds, but they also failed to inform their clients that the bonds could be affected by Lehman Brothers financial health. Wall Street firms marketed and sold Main Street Natural Gas Bonds as conservative, safe municipal bonds, when in fact, they were Lehman Brothers-backed complex derivative securities. When Lehman Brothers filed for bankruptcy in 2008, the value of the bonds dropped.

“We don’t expect payment due to the bankruptcy, so the bondholders will likely join unsecured creditors in bankruptcy court,” said Susan Reeves, chief financial officer of the Kennesaw, Georgia-based  authority, which provides gas for municipalities from Florida to Pennsylvania. “We don’t believe any other avenue is likely at this point.”

All three major rating companies cut the bonds’ rating to speculative grade after Lehman’s filing. They are rated B3 by Moody’s Investors Service, C by Fitch Ratings and D by Standard & Poor’s, according to data compiled by Bloomberg.

Given the Chapter 11 action, “we believe the funding of the early termination payment” by the parent company or the commodity unit is “unlikely,” S&P said.

Lehman bondholders may get anywhere from zero to 29 cents on the dollar, according to Peter Plaut, an analyst at Imperial Capital LLC, who said the bank’s senior unsecured bonds may be a “buy” at 15 cents. Lehman, once the fourth-largest U.S. securities firm, is selling assets to pay creditors as part of its liquidation in U.S. bankruptcy court in Manhattan.

Did your broker or brokerage sell you Main Street Natural Gas Bonds?  Call a FINRA Securities arbitration lawyer for a free consultation on how to recover your losses.  Call 888-760-6552, or visit www.stockmarketlawsuit.com. Soreide Law Group, PLLC. Representing investors nationwide before FINRA and the NFA.

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