Citigroup, Retrophin, Eletrobras, Quindell Probe: Compliance

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Citigroup Inc. agreed to pay almost $180 million to settle a U.S. regulator’s allegations that it defrauded wealthy clients of two failed hedge funds by telling them the investments were as safe as low-risk municipal bonds.

Citigroup units made false and misleading statements about the funds, which raised almost $3 billion from 2002 to 2007, the Securities and Exchange Commission said Monday in a statement. Before the funds collapsed in 2008, the bank didn’t tell most clients that an internal rating showed the investments posed significant risks to principal, and Citigroup also failed to disclose that one of the funds was seeking an emergency loan.

“Advisers at these Citigroup affiliates were supposed to be looking out for investors’ best interests, but falsely assured them they were making safe investments even when the funds were on the brink of disaster,” Andrew Ceresney, director of the SEC’s enforcement division, said in the statement.

The funds sought to exploit differences between yields on U.S. government debt and municipal bonds and used borrowed money to amplify those bets. The New York-based bank pushed clients into the funds even into the second half of 2007 when the funds began experiencing margin calls and liquidity problems, according to the SEC.

In settling the matter, Citigroup neither admitted nor denied the SEC’s allegations.

“We are pleased to have resolved this matter,” a company spokeswoman, Danielle Romero-Apsilos, said in an e-mailed statement.

Citigroup pitched the investment as a “better version of a bond” and instructed some clients to sell their unleveraged fixed-income portfolios to buy into the investment, according to the SEC.

Internally, the private bank rated the funds as having “significant risk to principal,” while not sharing that assessment with the majority of investors and salespeople, the SEC said.

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Mexican Billionaire’s Firms Swept Up in U.S. Probe of Citigroup

In addition to the SEC enforcement action, the U.S. Justice Department is looking into Citigroup Inc.’s dealings with companies linked to Mexican billionaire Carlos Hank Rhon as part of an expanding investigation into the bank’s money-laundering controls.

In a subpoena issued earlier this year, U.S. officials asked Citigroup to provide information on accounts tied to four businesses affiliated with Hank Rhon, according to documents reviewed by Bloomberg. These include two units each of Grupo Financiero Interacciones SA and Grupo Hermes SA, which are controlled by Hank Rhon and his family.

The Justice Department asked the bank to provide similar paperwork for a fifth firm, Banco Monex, that’s not connected to Hank Rhon; for a number of money-transfer businesses, and less-detailed information on more than a dozen other companies.

The documents indicate the Justice Department is examining anti-money laundering practices at Banco Nacional de Mexico, Citigroup’s Mexico unit known as Banamex, and investigating whether any of its clients were involved in money laundering.

Molly Millerwise Meiners, a spokeswoman for Citigroup, declined to comment, as did a spokesman for Monex.

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Quindell Probe Dropped by FCA Amid U.K. Criminal Investigation

The U.K. Financial Conduct Authority dropped its inquiry into Quindell Plc to make way for a separate criminal probe of the software company’s accounts.

The FCA decision follows talks with the U.K. Serious Fraud Office, which opened its own case this month, the watchdog said Tuesday in an e-mailed statement.

Quindell has been plagued by investigations during the last year after New York short seller Gotham City Research LLC published a report making accusations about its finances. Quindell won a U.K. libel judgment against Gotham in September but has been subject to probes from the FCA, SFO and the U.K. accounting regulator.

The Financial Reporting Council ended its review of Quindell’s 2011 and 2012 accounts this month with the company re-publishing its 2014 annual report with “substantial restatements,” the FRC said.

Quindell acknowledged the FCA’s decision in a statement.

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In Court

Retrophin Sues Founder in Latest Fight Over Use of Funds

Retrophin Inc. sued its founder, Martin Shkreli, for $65 million, claiming he breached his duty of loyalty to the biopharmaceutical company in a long-running dispute over his use of corporate funds.

Shkreli, who left the company in September, is the target of investor lawsuits over his trading in Retrophin stock. In addition, the company, which develops treatments for diseases including muscular dystrophy, has conducted an internal investigation into his conduct and said it has also received a subpoena for information on Shkreli tied to a probe by federal prosecutors in Brooklyn, New York.

The complaint against Shkreli was filed Monday in Manhattan federal court. In it, Retrophin claims he engaged in self-dealing and alleges that he wrongly enriched himself with “sham consulting agreements,” used company money to fulfill outside obligations and caused Retrophin to breach convertible note agreements to enhance his position.

The lawsuit is “baseless and meritless,” Shkreli said in a phone interview. “We’re going to win. They still owe me a substantial amount of money.”

The case is Retrophin Inc. v. Shkreli, 15-cv-06451, U.S. District Court, Southern District of New York (Manhattan).

Eletrobras Sued by U.S. City Over Brazilian Bribery Scheme

Brazil’s state-owned electric company, Centrais Eletricas Brasileiras SA, was sued by the city of Providence, Rhode Island, over claims that it failed to tell investors of a massive bribery and kickback scheme.

Providence filed the lawsuit Saturday in Manhattan federal court over money allegedly siphoned from a nuclear reactor and two dam projects. According to the complaint, billions of dollars paid by Eletrobras to construction and service contractors were diverted to company executives and Brazil’s Worker’s Party.

The filing may be the first against Eletrobras by an institutional investor in the U.S. An earlier suit was filed in the same court by an individual Eletrobras investor.

The case is City of Providence v. Centrais Eletricas Brasileiras SA, 15-cv-06434, U.S. District Court, Southern District of New York (Manhattan).

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