NEW YORK (Reuters) – Investors in a troubled municipal bond hedge fund sued several units of Citigroup on Thursday, less than three months after the banking giant committed $1 billion to shore up several of its funds.
The suit, filed in U.S. District Court in Manhattan, concerns the MAT Five LLC fund, which required a minimum investment of $500,000, and was promoted in December 2006 to fixed-income investors as being able "to produce stable cash flows in a tax-advantaged arbitrage opportunity."
Investors were told that previous funds had net returns of 14 percent on a tax-equivalent basis, the suit said.
MAT Five would use a strategy of building a leveraged portfolio of high-quality, tax-exempt municipal bonds and simultaneously hedging the duration risk in that portfolio by shorting the equivalent of taxable corporate bonds, according to the lawsuit.
The MAT Five fund selling documents given to investors "were false and misleading in that the strategy to be employed would not protect investors" who were told that the investments "would be AAA/AA-rated municipal bonds, swaps, swapoptions and Treasuries," the lawsuit said.
