A FINRA arbitration panel awarded a group of 5 Memphis, TN, investors $2.4 million for losses they incurred in a Citigroup municipal arbitrage fund that lost most of its value from 2007 to 2008.  The  claim, filed in 2009, sought damages related to "MAT Five" - one of the MAT Finance LLC series of funds.  ['MAT' - short for Municipal Arbitrage Trust]  The funds, which also are subject of an SEC investigation, borrowed at low short-term rates and invested in longer-term bonds that paid higher rates.  The investors accused Citigroup Global Markets Inc. of misrepresenting the fund's risk and breaching its fiduciary duty, among other allegations, according to the FINRA panel ruling dated 12/1/10. 

The $2.43mn fully compensates the investors for their out-of-pocket losses and interest they would have received had they invested in a muni bond portfolio, their lawyer said.  The Finra panel didn't spell out details of the case or the reasoning behind its decision.  A Citigroup spokesperson called the panel's decisions inconsistent, and said the bank believes the claims are meritless. 

Although bonds are generally less volatile than stocks, the MAT funds eventually was highly leveraged - having borrowed more than $8 for every $1 invested - which magnified the risk from even small changes in the bonds' value.  The funds were typically sold to very high net-worth investors and marketed as an alternative to municipal-bond portfolios, according to the claim.  The funds in this case were purchased in February 2007 through Smith Barney, then Citigroup's retail brokerage.  Smith Barney and Morgan Stanley have since merged their brokerage operations (in 2009)   [WSJournal, 12/3]