On Tuesday, a FINRA arbitration panel ordered Citigroup Inc. to pay $54.1 million to two wealthy investors for losses suffered on a series of risky municipal bond funds.  Here's an update on yesterday's story.

• The claimant investors are:  Jerry Murdock Jr., 52, a VC investor;  Gerald Hosier, 69, a retired patent attorney.
• Investors Murdock and Hosier are neighbors in Aspen, CO;  they had the same broker at Citi's former Smith Barney unit - Richard Zinman, who left the firm shortly after the funds blew up.  He now works for Credit Suisse.

• RR Zinman testified for his former clients during the arbitration hearing - saying the funds, which were designed for wealthy investors, proved to be more volatile and risky than Citi officials had told its brokers - according to claimant's lawyer.
• After a storm of protest by Citi brokers, Citi officials offered share buybacks that reduced investors' losses to about 61%.

• The $54.1mn was the largest industry arbitration award ever levied against a major Wall Street brokerage in favor of individual investors.
• The largest previous award to individuals under arbitration procedures, which are mandatory in most Wall Street customer agreements, was a $20.2mn award to a group of individuals against Ameriprise Financial Inc. in 2006, re: the sale of variable annuities and mutual funds.
• The largest previous award to a Citi bond-fund claimant was for $6.4mn.

• The bond funds had a minimum investment of $500K.
• The funds aimed to provide increased returns by leveraging as much as $7 for every $1 invested - the proceeds were pout into in municipal bonds and mortgage debt. 
• The investments lost 77% of their value in the midst of the financial crisis.
• Both the muni bonds and mortgage debt plummeted in value when the mortgage market crumbled starting in mid-2007.

• While the panel didn't provide an explanation for the award, the penalties levied - $17mn in punitive damages and $3mn in legal fees, among other expenses, were quite unusual and aggressive - e.g., Citi has to pay all entire hearing fees, $21.6K;  panels usually split those fees between the parties.
• The award is just the latest problem to spring from Citigroup's municipal-bond funds.  The bond funds also are the subject of an SEC probe into whether the bank misled investors by failing to disclose the funds' risks.

Citigroup said in a statement, "We are disappointed with the decision, which we believe is not supported by the facts or law." It also said it is reviewing its options, which include going to the courts with an appeal.

Thomas Stipanowich, a law professor at Pepperdine University law school in Malibu, Calif., called the panel's action "a significant statement, a bold use of a variety of remedial tools to vindicate the rights of an individual investor."   [WSJournal, 4/13/11]

[WSJournal, 4/13]