Citigroup is catching flak after the implosion of two of its flagship hedge funds (Falcon and ASTA/MAT). For example, plaintiffs attorney Jacob Zamanksy argues at Seeking Alpha that the culture at Citi encouraged the pursuit of risky, outsized returns with little regard for transparency or honesty. Although the funds were levered to the hilt, Zamansky says, fund managers told wealthy clients that their investments were “conservative,” and could only lose 5% a year in the worst case scenario. Brokers ignored the risk because they didn’t understand it:
[M]ost brokers don’t have the training or the acumen to understand highly complex and sophisticated financial instruments. So they dutifully rely on the representations given to them by their superiors, who are richly compensated for moving the products out the door.
Herein lies the vicious circle: Citigroup concocts inherently risky funds for its brokers to sell to their wealthy clients that generate handsome fees for the firm and commissions for its brokers. The brokers are told to market the fund as a “conservative” investment, notwithstanding that fact that the funds are so levered that a few ticks the wrong way causes the house-of-cards to collapse. The brokers mimicked the company’s recommended sales pitch to their clients and successfully wrangled hundreds of millions of lucrative assets.
The wealth management executives who developed the fund, Zamansky argues, did understand the risks. They failed to accurately describe the financial products they were selling, and their clients got screwed.
…many of the Smith Barney brokers who marketed the funds themselves were likely led to believe the funds were in fact “low risk.” At a minimum, there was a lack of due diligence. Now that markets are under pressure, Citigroup wants to shift the onus of blame to its brokerage force, rather than hold its wealth management executives accountable. Blaming the folks who followed orders – rather than the ones who gave them – is the way Wall Street works.
As usual, Zamansky concludes, the folks who concocted the products won’t be held responsible. (Unless plaintiffs hire Jacob Zamansky?)
Disclosure: Clusterstock editor Henry Blodget was once sued by Jacob Zamansky over brokerage research he produced at Merrill Lynch. Blodget believes it is possible that Zamansky is right, that Citi’s brokers were “told to market the hedge funds as conservative investments,” but he would like to see evidence of this (It’s also possible, he thinks, that Citi’s wealthy clients didn’t need to be sold on the products, because they were eager to get in on some of that famous hedge-fund mojo). Since Zamansky is taking a stand for “transparency,” Blodget thinks it might also have been appropriate for Zamansky to remind SA readers that he is in the business of suing companies based on allegations like those above.