UNITED STATES OF AMERICA

Before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933

Release No. 9893 / August 17, 2015

SECURITIES EXCHANGE ACT OF 1934

Release No. 75710 /August 17, 2015

INVESTMENT ADVISERS ACT OF 1940

Release No. 4174 / August 17, 2015

ADMINISTRATIVE PROCEEDING

File No. 3-16757

In the Matter of

Citigroup Alternative Investments LLC 

and

Citigroup Global Markets Inc.,

Respondents.

ORDER INSTITUTING ADMINISTRATIVE 

AND CEASE-AND-DESIST PROCEEDINGS 

PURSUANT TO SECTION 8A OF THE 

SECURITIES ACT OF 1933, SECTION 15(b)(4)

OF THE SECURITIES EXCHANGE ACT OF 

1934, AND SECTIONS 203(e) and 203(k) OF 

THE INVESTMENT ADVISERS ACT OF 1940, 

MAKING FINDINGS, AND IMPOSING 

REMEDIAL SANCTIONS AND A CEASE-ANDDESIST ORDER 

I.

The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Section 15(b)(4)

of the Securities Exchange Act of 1934 (“Exchange Act”), and Sections 203(e) and 203(k) of the 

Investment Advisers Act of 1940 (“Advisers Act”) against Citigroup Alternative Investments LLC 

(“CAI”) and Citigroup Global Markets Inc. (“CGMI”) (together, “Respondents”). 

II.

In anticipation of the institution of these proceedings, Respondents have submitted an Offer 

of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the 

purpose of these proceedings and any other proceedings brought by or on behalf of the 

Commission, or to which the Commission is a party, and without admitting or denying the findings
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herein, except as to the Commission’s jurisdiction over Respondents and the subject matter of 

these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting 

Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 

1933, Section 15(b)(4) of the Securities Exchange Act of 1934, and Sections 203(e) and 203(k) of 

the Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a 

Cease-and-Desist Order (“Order”), as set forth below. 

III.

On the basis of this Order and Respondents’ Offer, the Commission finds that:

Summary

These proceedings concern material misstatements and omissions made by Respondents 

between 2002 and 2007 in the offer and sale of securities in two now-defunct hedge funds—the 

ASTA and MAT funds (“ASTA/MAT”) and the Falcon Strategies funds (“Falcon”). The 

ASTA/MAT and Falcon funds were recommended and sold by two groups of individuals, the 

“financial advisers” of Smith Barney and the “private bankers” of Citigroup Private Bank (together, 

the “financial advisers”), to their advisory clients. The financial advisers were associated with 

respondent CGMI. Both funds were managed by respondent CAI, which acted through its 

employees, including an employee who had a primary role in creating the funds and serving as the 

funds’ manager during the relevant time period (the “fund manager”). Respondents raised 

approximately $2.898 billion from approximately 4,000 investors in ASTA/MAT and Falcon. In 

2008, both funds collapsed resulting in billions of dollars in losses.

From 2002 through 2008 (the “relevant period”), financial advisers and the fund manager 

misrepresented the funds’ risks and performance to advisory clients, who were told that the 

investments were “safe,” “low-risk,” “bond substitutes” and suitable for traditional bond investors, 

despite statements in marketing documents that the funds should not be viewed as a bond substitute. 

In addition, while the risk of principal loss was disclosed in written materials provided to clients, 

certain financial advisers and the fund manager orally minimized the significant risk of loss 

resulting from, among other things, the funds’ investment strategy and use of leverage. Investors 

were also told that the biggest risk facing ASTA/MAT was the adoption of a flat income tax by the 

federal government. Financial advisers encouraged many of their advisory clients to sell portions of 

their bond portfolios in order to invest in the funds. In late 2007, financial advisers and the fund 

manager continued to offer and sell Falcon as a safe, low-risk investment, even though both funds—

the Falcon fund was 20 percent invested in the ASTA/MAT fund—began experiencing increased 

margin calls and liquidity problems in the second half of 2007 that continued until the funds 

collapsed. 

Moreover, the fund manager was involved in virtually all fund-related communications with 

the financial advisers and investors. The fund manager and the fund manager’s staff were 

responsible for drafting and reviewing offering materials for the funds, crafting sales pitches to 

investors, training CAI sales personnel (who, in turn, were responsible for marketing the funds to 

the financial advisers), drafting quarterly investor reports, disclosing interim fund performance, and 
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managing the funds themselves. Furthermore, throughout the fund offerings and fund operations, 

the fund manager and the fund manager’s staff at CAI met with prospective investors and responded

directly to inquiries from the financial advisers concerning the funds without sufficient oversight 

governing those oral communications. The fund manager and his staff at CAI had significant 

influence over the dissemination of information relating to the funds without review or oversight,

including information relating to the funds’ risks and performance. CAI failed to implement a 

system in which the fund manager’s authority was checked adequately or to ensure that the fund 

manager’s communications with investors and financial advisers concerning the ASTA/MAT and 

Falcon funds were accurate and not misleading.

Respondents

1. CAI is an indirect wholly-owned subsidiary of Citigroup Inc. and has its principal 

place of business in New York, New York. CAI was the investment manager for the ASTA/MAT 

and Falcon funds. CAI had its own sales force, or “wholesalers,” who, along with the fund 

manager and the fund manager’s staff, were responsible for marketing the ASTA/MAT and Falcon 

funds to the financial advisers. During the relevant period, CAI had approximately $59 billion in 

assets under management. CAI has been registered as an investment adviser with the Commission 

since 2002.

2. CGMI is an affiliated company of Citigroup Inc. and has its principal place of 

business in New York, New York. During the relevant period, Smith Barney was a business 

division of CGMI. The financial advisers who recommended and sold ASTA/MAT and Falcon 

fund shares to investors were associated persons of CGMI. In 2009, Smith Barney entered into a 

joint venture with Morgan Stanley Global Wealth Management Group to become Morgan Stanley 

Smith Barney, in which Citigroup owned a 49 percent stake in the venture and Morgan Stanley 

owned the remaining 51 percent. In 2012, Morgan Stanley purchased Citigroup’s interest in the 

joint venture. CGMI has been registered with the Commission since 1960 as both an investment 

adviser and a broker-dealer.

 

Background

3. From September 2002 through February 2007, Respondents offered and sold 

approximately $1.962 billion of investments in ASTA/MAT to approximately 2,700 investors and 

advisory clients of CGMI. ASTA/MAT was a municipal arbitrage fund that purchased municipal 

bonds and used a Treasury or LIBOR swap to hedge interest rate risks. The ASTA/MAT fund 

employed 8-12 times leverage. 

4. From October 2004 through October 2007, Respondents offered and sold 

approximately $936 million of investments in Falcon to approximately 1,300 investors and 

advisory clients of CGMI. Falcon was a multi-strategy fund that invested in ASTA/MAT and 

other fixed income strategies, such as CDOs, CLOs, and asset-backed securities. The Falcon fund 

employed 5-6 times leverage. 
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5. Falcon and ASTA/MAT were managed in accordance with disclosed investment 

strategies, including leverage guidelines. Falcon and ASTA/MAT were not offered generally to 

retail investors, but were limited to “qualified purchasers” as defined by Section 2(a)(51)(A) of the 

Investment Company Act of 1940 and “accredited investors” within the meaning of Rule 501(a) of 

Regulation D of the Securities Act of 1933. In addition, Respondents recommended that investors 

in Falcon invest no more than 10 percent of their assets and that investors in ASTA/MAT invest no 

more than 5 percent of their assets. 

6. Investors in the ASTA/MAT and Falcon funds paid advisory fees for essentially 

receiving two tiers of investment advice. First, the investors in both ASTA/MAT and Falcon 

were advisory clients of the financial advisers (who were associated with CGMI) and paid for 

investment advice, including placement fees relating to their investments. Secondly, CAI, acting 

primarily through the fund manager and the fund manager’s staff, managed both the ASTA/MAT 

and Falcon funds and received management fees from the investors. Investors in ASTA/MAT 

and Falcon directly or indirectly paid CAI and CGMI a total of approximately $212.5 million in 

fees associated with investments in the two funds. Of this amount, the Respondents returned 

approximately $72.5 million to investors as compensatory payments following the collapse of 

the funds.

7. Respondents, acting through associated persons—the financial advisers, in the case 

of CGMI, and the fund manager, in the case of CAI—made material misstatements and omissions 

to investors in the offer and sale of shares in the ASTA/MAT and Falcon funds. 

Respondents’ Violations

8. Financial advisers and the fund manager orally represented to investors that Falcon 

was a “safe,” “low-risk” investment, akin to a “bond substitute” or “bond alternative” that had the 

same risk profile as a municipal bond investment but with a slightly higher return. Internal sales 

pitches stated that Falcon “walks like a bond, talks like a bond, [has] cashflow like a bond” and 

described Falcon as a “better version of a bond.” Consistent with that marketing theme, Falcon 

was benchmarked against the Lehman Aggregate Bond Index, which is used to evaluate the 

performance of bond portfolios. Some investors were encouraged to sell their unleveraged bond 

portfolios in order to purchase shares in the Falcon fund.

9. Financial advisers, the fund manager and other CAI staff involved in the marketing 

of the funds also orally represented to investors that ASTA/MAT was a “safe,” “low-risk” 

investment, notwithstanding certain risk disclosures in the ASTA/MAT offering materials. 

Financial advisers, the fund manager and other CAI staff involved in the marketing of the funds

told investors that ASTA/MAT had a very low risk of permanent loss, particularly if investors 

were willing to hold the investment for at least five years. Financial advisers and the fund manager 

also told investors that the biggest risk facing the ASTA/MAT fund was the adoption of a flat 

income tax by the federal government. Some investors were encouraged to sell their bond 

portfolios in order to purchase shares in the ASTA/MAT fund.
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10. Financial advisers, the fund manager and other CAI staff involved in the marketing 

of the funds made false and misleading statements regarding the risks associated with an 

investment in the ASTA/MAT and Falcon funds. The funds were not bond substitutes, and an 

investment in the funds carried significantly greater risk than a bond investment. The funds used 

significant amounts of leverage that increased the risk of both margin calls and loss in value. In 

fact, Citigroup Private Bank had an internal risk rating system that rated the funds as having 

“significant risk to principal.” That rating, however, was not shared with the majority of investors 

and financial advisers. 

11. Furthermore, CAI performed back-testing on a hypothetical ASTA/MAT portfolio 

to evaluate the fund’s performance over a period of time. The back-testing analysis showed that an 

investment in the ASTA/MAT fund carried far greater risk than that described to investors. CAI, 

however, misrepresented the results of that back-testing analysis. Some financial advisers and 

investors were told that the hypothetical ASTA/MAT portfolio had been back-tested over a fiveyear period (1996 to 2001), and that, over such period, the largest decline in the portfolio was 

approximately 7 percent. That statement was false because the back-testing actually showed that 

the portfolio, when fluctuations in bond prices over the entire time period were analyzed, declined 

by up to 32 percent in value. Moreover, CAI actually had back-tested the hypothetical 

ASTA/MAT portfolio over a six-year period (1995 to 2001), during which time the portfolio 

declined by approximately 48 percent. Consequently, the risk of loss associated with an 

investment in the ASTA/MAT fund, which also accounted for approximately 20 percent of 

Falcon’s investments, was significantly higher than conveyed to some financial advisers and 

investors.

12. CAI and CGMI failed to require any changes in the way in which the funds were 

described to investors, even as the funds’ performance significantly declined and the risk of 

investor losses increased. 

13. In August 2007, the Falcon fund experienced margin calls. Lender or leverage 

provider valuations for fund assets declined significantly while the amount of collateral demanded 

by those lenders increased. In order to generate necessary liquidity and to meet increasing margin 

calls, the fund manager sold approximately $2 billion of fund assets, and made an “urgent request” 

for a “contingency liquidity plan”—essentially a loan from CAI or Citigroup Inc.—in the amount 

of $200 million for Falcon, which was denied. 

14. As the Falcon fund experienced significant declines in liquidity, the fund manager 

and some financial advisers misrepresented the fund’s performance and liquidity to investors, who 

were assured that Falcon had low liquidity risks and secure financing terms. The investors were 

not informed of Falcon’s liquidity issues, the sale of $2 billion in fund assets to meet margin calls, 

or the fund manager’s request for a $200 million loan from CAI or Citigroup Inc.

15. In September and October 2007, the financial advisers and CAI, acting through the 

fund manager and the fund manager’s staff, recommended, offered and sold additional shares in 

the Falcon fund, and raised approximately $110 million from new investors without disclosing 
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how the declining market conditions of the time were affecting Falcon’s liquidity. In fact, CAI and 

CGMI continued to recommend the funds as safe, low-risk investments.

16. From November 2007 through March 2008, Falcon continued to experience a 

severe liquidity shortage. Internally, the fund manager stated that the fund’s liquidity was “getting 

close to dangerous territory.” The fund manager sold over $6.4 billion of fund assets between 

November 2007 and January 2008 to generate liquidity, and re-submitted a contingency liquidity 

plan request to supervisors at CAI for $400 million. This, too, was denied. By January 2008, the 

fund manager had drawn up potential “liquidation scenarios” for the Falcon fund. 

17. During this period, the fund manager and some financial advisers, however, 

continued to misrepresent Falcon’s performance and liquidity to investors by telling them that 

Falcon had “adequate liquidity” and reassuring investors that the fund was “well capitalized.” 

They failed to disclose the fund’s requests for liquidity support—which were denied by CAI and 

Citigroup Inc. —the increasing margin calls, and the sale of over $8.4 billion in fund assets to meet 

Falcon’s margin calls. CAI lacked policies and procedures that would have ensured that

communications with investors were consistent with the funds’ actual performance and liquidity 

position.

18. During this same time period—late 2007 and early 2008—the fund manager also 

orally misrepresented the condition of the ASTA/MAT fund and its ability to survive a declining 

market. By the fall of 2007, the fund manager was instructed by supervisors at CAI to begin 

selling ASTA/MAT assets in order to reduce the fund’s leverage. Despite the negative market 

conditions and instructions to begin reducing leverage, the fund manager continued to tell investors 

that the biggest risk to the fund was the adoption of a flat income tax by the federal government. 

The fund manager reassured investors just weeks before the fund collapsed that the risk of loss was 

minimal.

19. CAI failed to adopt and implement policies and procedures to prevent the 

misrepresentations made to investors. The fund manager had virtually complete control of the 

information disseminated to investors without sufficient review to ensure that those 

communications were accurate. CAI employed its own sales personnel, or wholesalers, who were 

educated on the funds by the fund manager. The fund manager and the fund manager’s staff 

drafted sales pitches for the wholesalers that were not subject to review or approval by anyone 

outside of the fund manager’s staff, including anyone in the compliance group. Those sales pitches 

and talking points misrepresented the risks of the funds. The wholesalers, in turn, were responsible 

for marketing the funds to the financial advisers. The fund manager and the fund manager’s staff 

were also responsible for educating the financial advisers on the risks of the funds, and fielded 

client and other inquiries from financial advisers concerning the funds. Finally, in many instances, 

the fund manager and the fund manager’s staff also had direct communications with investors, 

during which they misrepresented the funds’ risks. CAI failed to exert reasonable oversight for the 

sales pitches, talking points, and oral communications made by the fund manager to the financial 

advisers and investors.
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20. In addition, the fund manager and the fund manager’s staff played a significant role 

in drafting and disseminating information regarding the funds to investors and financial advisers

without sufficient review or oversight to ensure that the information given to investors was 

accurate. In particular, the fund manager and the fund manager’s staff designed, implemented and 

analyzed the back-testing for ASTA/MAT. They also drafted the quarterly investor reports and 

provided investors and financial advisers with performance information orally in meetings and on 

conference calls that did not fully disclose negative fund performance. CAI failed to exert

reasonable oversight over these functions. 

21. As a result of the conduct described above, CAI and CGMI willfully violated 

Sections 17(a)(2) and 17(a)(3) of the Securities Act, which prohibit fraudulent conduct in the offer 

or sale of securities. In addition, CGMI willfully violated Section 206(2) of the Advisers Act,

which prohibits any adviser from engaging in any transaction, practice or course of business which 

operates as a fraud or deceit upon any client or prospective client, and CAI willfully violated 

Section 206(4) of the Advisers Act and Rule 206(4)-7 promulgated thereunder, which prohibit an 

investment adviser from providing investment advice to clients without adopting and implementing 

written policies and procedures reasonably designed to prevent violation of the Act and the Rules 

adopted under the Act, and Rule 206(4)-8 promulgated thereunder, which prohibits an investment 

adviser to a pooled investment vehicle from making any untrue statement of a material fact or 

omitting to state a material fact necessary to make the statements made, in the light of the 

circumstances under which they were made, not misleading, to any investor or prospective investor 

in the pooled investment vehicle.

IV.

In view of the foregoing, the Commission deems it appropriate and in the public interest to 

impose the sanctions agreed to in Respondents’ Offer.

Accordingly, pursuant to Section 8A of the Securities Act, Section 15(b)(4) of the 

Exchange Act and Sections 203(e) and 203(k) of the Advisers Act, it is hereby ORDERED that:

A. Respondents CAI and CGMI shall cease and desist from committing or causing any 

violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act. 

Additionally, CGMI shall cease and desist from committing or causing any violations and any 

future violations of Section 206(2) of the Advisers Act, and CAI shall cease and desist from 

committing or causing any violations and any future violations of Section 206(4) of the Advisers 

Act and Rules 206(4)-7 and 206(4)-8 promulgated thereunder. 

B. Respondents CAI and CGMI are censured. 

C. Respondents shall, within ten days of the entry of this Order, pay disgorgement of 

$139,950,239 and prejudgment interest of $39,612,089 to the Securities and Exchange

Commission. If timely payment is not made, additional interest shall accrue pursuant to SEC Rule 

of Practice 600. Payment must be made in one of the following ways: 
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(1) Respondents may transmit payment electronically to the Commission, which will 

provide detailed ACH transfer/Fedwire instructions upon request;

(2) Respondents may make direct payment from a bank account via Pay.gov through the 

SEC website at http://www.sec.gov/about/offices/ofm.htm; or 

(3) Respondent may pay by certified check, bank cashier’s check, or United States postal 

money order, made payable to the Securities and Exchange Commission and handdelivered or mailed to: 

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169

Payments by check or money order must be accompanied by a cover letter identifying 

Citigroup Alternative Investments LLC and Citigroup Global Markets Inc. as Respondents in these 

proceedings, and the file number of these proceedings; a copy of the cover letter and check or 

money order must be sent to Sanjay Wadhwa, Senior Associate Regional Director, Division of 

Enforcement, Securities and Exchange Commission, New York Regional Office, Brookfield Place, 

200 Vesey Street, Suite 400, New York, NY 10281. 

D. A plan of distribution shall be submitted within 120 days of payment in full by 

Respondents of the disgorgement and prejudgment interest ordered. Commission staff may 

extend the deadline for plan submission for good cause shown. Respondents shall bear the costs 

of any administration and distribution of funds to investors in the ASTA/MAT and Falcon funds

ordered hereunder, including all fees of professionals that provide related services to the distribution 

of the fund, including tax administration. A fund administrator shall be entitled to reasonable fees 

and reimbursement for reasonable costs and expenses in connection with overseeing and 

administering the fund distribution. Respondents will pay all reasonable costs and expenses 

associated with the administration of the distribution, including the cost of the fund administrator 

bond.

By the Commission.

Brent J. Fields

Secretary