A Citigroup Inc. unit must pay more than $1.4 million to an investor for losses tied to a municipal bond that was marketed as "safe," but was steeped in risky derivative securities, according to an arbitration ruling.
Margaret Hill of New York City had requested more than $3.5 million in damages for losses stemming from Citi's Rochester Municipal Fund, according to a Financial Industry Regulatory Authority arbitration award. She filed the case in 2011, alleging that Citigroup Global Markets Inc sold her unsuitable investments and misrepresented facts, among other things, according to the ruling, dated September 5.
Hill initially owned individual municipal bond funds, but bought the Rochester Fund in 2007 after Citigroup recommended it as a "safe" alternative to her funds that would pay slightly more interest, according to Hill's lawyer, Steven Caruso of Maddox, Hargett & Caruso, P.C. in New York. Instead, the fund consisted mainly of risky derivative securities and tobacco bonds, Caruso said.
The value of derivative securities depends on the performance of underlying assets which can wildly fluctuate. Hill lost $2.9 million when she sold the funds in 2009.
The case highlights questionable sales practices that can affect a range of investors. Wealthy investors, in particular, are often asked to defend their investment choices by brokerage lawyers in arbitration cases, said Caruso, because of a false assumption that they must have a deeper understanding of what they are buying than an average investor. Wall Street often mistakenly equates wealth with financial know-how, Caruso said.
A Citigroup spokeswoman was not immediately available for comment.
The panel, as is customary, did not explain the reasons for its ruling. It also denied a request by the Citi broker involved in the transaction to expunge, or erase, details about Hill's arbitration complaint from his public disclosure record.
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