Citigroup Ordered by FINRA to Pay $54.1M to Two Investors Over Municipal Bond Fund Losses

In what is being called the largest award that a major Wall Street broker-dealer has been ordered to pay individual investors, the Financial Industry Regulatory Authority has ordered Citigroup to pay $54.1 million to investors Suzanne Barlyn and Randall Smith over investment losses they sustained on high risk municipal bond funds that lost 77% of their value during the financial crisis.

Richard Zinman, formerly of Citi’s Smith Barney unit, was the broker for Murdock, a venture capital investor, and Hosier, a retired patent lawyer. Zinman left Citi soon after the funds blew up. During the arbitration hearing, he testified on behalf of the two men, saying that Citi did not tell its brokers how risky and volatile the funds in fact were. Zinman now works for Credit Suisse Group.

Citigroup has been under fire for awhile now over its municipal bond funds. Geared towards wealthier clients, investments were a minimum of $500,000. The bond funds were supposed to deliver returns a few percentage points above that of municipal bonds by borrowing up to $7 for every $1 invested. The proceeds were placed in mortgage debt and municipal bonds. Unfortunately, the municipal bond funds’ value dropped when the mortgage market started to fail. After Citi brokers complained, however, the financial firm offered share buybacks that lowered investor losses to approximately 61%.

As part of this case, Citi must pay $17 million in punitive damages, $3 million in legal fees, and $21,600 for the hearing free expense, which is normally divided between the parties involved. Prior to this award, the largest one Citi was ordered to pay against a bond-fund claimant was $6.4 million.

Related Web Resource:
Citigroup Loses Muni Case, The Wall Street Journal, April 13, 2011
Muni bonds hit by more selling on default fears, Los Angeles Times, January 12, 2011

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SEC to Examine Muni Bond Market Issues During Hearings in Texas and Other States, Stockbroker Fraud Blog, February 9, 2011
Ex-Portfolio Managers to Pay $700K to Settle SEC Charges that They Defrauded the Tax Free Fund for Utah, Stockbroker Fraud Blog, January 22, 2011
Federal Judge to Approve Citigroup’s $75M Securities Settlement with SEC Over Bank’s Subprime Mortgage Debt Reporting to Investors, Institutional Investor Securities Blog, September 29, 2010
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