NASD Fines Citigroup for Distributing Inappropriate Hedge Fund Sales Literature

>The fine – which is the largest to date regarding hedge fund activity by a broker-dealer, according to a NASD press release – is the result of Citigroup Global Markets’ distribution of over 100 pieces of literature that stated target rates of return without substantial evidence to support such expectations. Citigroup neither provided a sound basis for evaluating the target rate nor used proper graphs or charts in its statements. It also provided inadequate risk disclosure in some of the literature disseminated for publicity means.

>Ninety-five of the 100 pieces of literature given out by Citigroup contained target rates of return for particular funds without substantial evidence. The language used in the literature was such that potential investors were led to believe that predicted returns were supported by substantial evidence, when, in fact, they were not. For example, one such piece of literature purported that a specific hedge fund “….target[ed] a 12-14% annual net return,” without producing evidence to support such assertions.

>Twenty-eight pieces included hypothetical fund returns, showing results for funds before they had begun operations. This led to misrepresentation regarding future returns, the NASD press release asserts. Forty-four pieces of literature failed to provide adequate risk disclosure, failing to mention the possible negative effects of hedge fund investment.

>NASD, a private-sector provider of financial regulatory services, has launched multiple enforcement actions against brokers directing clients towards hedge fund investors as of late. Investors can check the disciplinary record of any NASD-registered broker or brokerage firm at www.nasdbrokercheck.com .