Citadel Said in Talks to Sell Investment Bank, Shut Research

Citadel's Ken Griffin
Kenneth Griffin, founder and chief executive officer of Citadel LLC, attends the Robin Hood Foundation gala in New York. Photographer: Amanda Gordon/Bloomberg

Ken Griffin, founder of $11 billion hedge fund Citadel LLC, is in talks to sell his investment bank and is shutting its equity-research group, ending a three-year effort to build a business he said would rival Goldman Sachs Group Inc., according to two people briefed on the move.

Citadel Securities will disband the research team headed by Jaine Mehring, a former managing director at Lehman Brothers Holdings Inc., said the people, who asked not to be identified because the decision hasn’t been made public. It’s also firing employees elsewhere in the investment bank, the people said.

Griffin, 42, founded New York-based Citadel Securities in late 2008 to offer underwriting, stock, bond and derivatives trading, and advice on mergers, acquisitions and restructurings. The unit, whose efforts were hampered by executive turnover, will now focus on providing electronic trading to institutions and on its market-making business, which started in 2002, the people said.

“He had visions of taking on the giants of Wall Street, and he found it too hard,” Geoff Bobroff, an investment-management consultant in East Greenwich, Rhode Island, said today in a telephone interview. “Managing these types of business is a lot different from investing in them.”

Devon Spurgeon, a spokeswoman for Chicago-based Citadel, declined to comment.

Societe Generale

Citadel has been looking for buyers to hire its investment bankers and take over any obligations to its employees, according to two people familiar with the matter. Citadel also talked to Societe Generale SA, about the Paris-based bank taking on a team of fixed-income salespeople and traders, said the people, who asked not to be named because the discussions are private. No deal has been struck, they said.

Calls to Societe Generale seeking comment weren’t immediately returned.

Citadel’s foray into investment banking was typical of Griffin, who has seized opportunities when others were in distress since founding his hedge fund in 1990 at age 22.

“What has served us well over the last 20 years is a constant willingness to innovate and to go where we see opportunity,” Griffin, who started trading convertible bonds from his Harvard University dorm room, said in an October 2009 interview. “I do believe in the next five years we will have created one of the great sales and trading operations.”

Executive Turnover

Griffin hired Rohit D’Souza in October 2008 to spearhead the securities business and a slew of former Merrill Lynch & Co. executives to run the group. D’Souza quit a year later and was replaced by Patrik Edsparr, who was ousted after seven months in the role following disagreements over business strategy and management.

At least another eight executives left in the past two years, including Todd Kaplan, who ran investment banking, Brad Kurtzman, who ran equity derivatives sales and trading, and Carl Mayer, head of leveraged finance.

“Citadel Securities has been in flux almost since day one,” said Gregory Cresci, an executive recruiter at Odyssey Search Partners in New York. “It seemed like an opportunistic move back in 2008, but they clearly didn’t manage to get enough traction.”

Citadel Securities had more than 400 employees globally as of September 2009, according to a marketing presentation. The unit had about 500 clients trading contracts valued at more than $1 billion a week, Spurgeon said in October.

Research Team

The investment bank started offering research to clients last September and planned to have a team of 12 senior analysts by the middle of this year, Spurgeon said in October.

Citadel Securities reported earnings of $81.6 million on revenue of $1.01 billion in 2009, most of which came from Citadel’s options and equities market-making business, according to financial statements filed February 2010 with the U.S. Securities and Exchange Commission.

Griffin in May agreed to sell his hedge fund-servicing business, Omnium LLC, to Northern Trust Corp. for at least $100 million.

Citadel’s biggest hedge funds lost 55 percent in 2008 as global markets tumbled. Those funds have produced annual gains since then and returned about 14 percent this year through July, according to a person familiar with the matter. Hedge funds on average lost 19 percent in 2008 and gained 4.4 percent this year through July, according to data compiled by Bloomberg.

“Investors will applaud the renewed focus on the asset-management business, if Citadel is moving in that direction,” said Daniel Celeghin, a partner at Casey Quirk & Associates LLC, a Darien, Connecticut-based firm that advises asset managers.

Fixed-Income Arbitrage

Griffin started making fixed-income arbitrage trades in 1999, profiting from the price differences between related bonds, after hedge fund Long-Term Capital Management LP lost more than $4 billion and was bailed out by its lenders, who also pulled back from that type of investing.

Three years later, after the bankruptcy of Enron Corp., then the world’s largest energy trader, Griffin hired a dozen investment professionals and a team of meteorologists and started buying and selling oil, gas and electricity contracts.

In 2006, he bought natural-gas positions from hedge fund Amaranth Advisors LLC after it lost $6.6 billion. Citadel managed as much as $21 billion before the losses in 2008.

As banks were taking bailouts from the U.S. government in 2008, Griffin again saw an opportunity. He said he would win business by providing better customer service than larger firms.

‘Fill the Need’

“The chance to build, to fill the need created in 2007 and 2008, was a once-in-a-lifetime opportunity,” Griffin said in the 2009 interview. Some brokers failed their customers in the fourth quarter of 2008, when global markets plummeted after the bankruptcy of Lehman Brothers, by not providing bids for those who wanted to sell securities or by low-balling them on prices, he said at the time.

Instead of getting weaker, the big banks thrived. Goldman Sachs reported its most profitable year in 2009, and JPMorgan Chase & Co. made its most money ever last year.

“Citadel is a take-no-prisoners principal investor, not a financial-services provider to clients,” said Roy Smith, a finance professor at New York University’s Stern School of Business. “They may think the business is a natural extension of their financial know-how, but potential clients will know that real and imagined conflicts of interest are too big to ignore.”

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