A FINRA arbitration panel has ordered Citigroup Global Markets to pay $54 million including compensatory and punitive damages to investors in its municipal arbitrage trust funds.
FINRA’s award marks the largest to date related to the municipal arbitrage trust, or MAT, and other municipal bond funds, according to Philip Aidikoff, partner at Beverly Hills, Calif.-based law firm Aidikoff, Uhl & Bakhtiari, who represented the claimants.
Those claimants include Gerald D. Hosier and his family investment company, Brush Creek Capital LLC, as well as Jerry Murdock Jr., a special limited partner at New York venture capital firm Insight Venture Partners. Hosier was the largest single investor in the MAT funds, said Aidikoff, who has represented more than 30 household clients tied to the MAT funds. Aidikoff estimates his firm has another 30 clients whose cases are pending in relation to those funds.
The claimants requested at least $48.2 million in the claim. The net out of pocket damage requested in the case totaled $26.89 million, Aidikoff said, while the panel awarded a total of $34.06 million with adjustments for what the claimants would have had if the money had been invested properly. At the same time, the FINRA panel ordered Citigroup to pay $17 million in punitive damages, which has not commonly been awarded in these cases, Aidikoff said. The panel also ordered Citigroup to pay $3 million in attorney fees.
The claim also accounted for Hosier’s investment in other products including Carlyle Capital and CSO, or Corporate Special Opportunities, as well as a swap in Pine Grove, Aidikoff said. The net out of pocket total for those funds was $7.9 million, with the remaining balance representing the net out of pocket for the MAT funds.
“It’s a significant decision because the panel recognized that Citigroup was liable for misrepresenting this product to its very best customers,” Aidikoff said.
The MAT funds were sold as a portfolio of municipal bonds that could enable its investors to get a couple of extra points while posing little risk, Aidikoff said. The funds misrepresented the risk they entailed, according to Aidikoff, and ultimately blew up in February 2008 with an inversion of some yield curves that could have been anticipated.
“It was misrepresented when it was sold by Citigroup to the brokers, and then the brokers repeated what they had been told,” Aidikoff said. None of the brokers have been implicated in the claims against Citigroup.
Aidikoff’s firm also represents the second-largest investor in the MAT funds, he said, who suffered net out of pocket losses of about $7 million. That case is scheduled to proceed next year.
"We are disappointed with the decision, which we believe is not supported by the facts or law and we are reviewing our options," a Citi spokesman said via e-mail.