山雨欲來 --- part 1

Citigroup's Hedge Fund Group Draws SEC Scrutiny, Filing Shows

By Thom Weidlich and Josh Fineman

May 30 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank by assets, said the Securities and Exchange Commission has requested records related to the firm's hedge funds as part of an informal inquiry.

Citigroup disclosed the review in a document filed May 28 in federal court in Manhattan, where investors in the bank's Falcon Strategies LLC fund have sued to halt a tender offer for their shares. Citigroup is trying to liquidate the fund, which has lost 80 percent of its value, according to court papers. The investors say they haven't been given enough information to gauge the value of their stakes.

``Citi has received two requests for documents concerning Citi-managed hedge funds in connection with an informal inquiry by the SEC,'' according to the filing. The document, a May 23 supplement to the tender-offer memo for a fund called Falcon Strategies Two LLC, doesn't say which funds were being examined.

``We are responding and cooperating fully to this informational request by the SEC,'' Citigroup spokesman Jon Diat said today. He declined further comment. SEC spokesman John Heine also declined to comment.

Citigroup has offered 45 cents per share in the Falcon Strategies LLC tender offer, which began May 8. The net asset value of the shares was $1 when the fund got started in 2004. The NAV is now between 19 and 21 cents, Citigroup has said in court papers.

On March 20, Citigroup said it was suspending redemptions and distributions from the Falcon fund, and has since been liquidating it.

Reaz Islam

Two months later, on May 23, an affiliated fund, Falcon Strategies Two B LLC, said that about 60 percent of its shares had been tendered and that it was extending the expiration date of its tender offer to June 30 from June 13.

The Falcon Strategies suit also names as a defendant Reaz Islam, the head of the Falcon Strategies hedge funds who is leaving the bank, according to an internal memo dated May 20. Islam has led Citigroup's fixed-income alternatives team for most of the past 12 years. He will remain with company for a ``transition period,'' New York-based Citigroup said in the memo.

The case is Ferguson Family Trust v. Falcon Strategies Two LLC, 08-cv-4723, U.S. District Court, Southern District of New York (Manhattan).