CSO Partners is a Citigroup fund that specializes in corporate debt. The Fund was started in 1999 with Citigroup’s own capital. CSO is based in London and compiled a solid track record investing in U.S. and European corporate debt. From the inception of the Fund it was managed by John Pickett. Pickett joined Salomon Brothers in the late 1980s as a bond analyst in New York. Pickett was well respected on Wall Street as one of the most talented credit traders in the business. In 2004, Citigroup began accepting money from outside investors such as pension funds and wealthy individuals. These investors now account for most of the Fund’s assets. Since allowing outside investors, it is believed that the Fund gained approximately 27% before investing in the private auction.
Citigroup runs an alternative-investment product group that includes hedge funds which is a relatively small business for Citigroup. Citigroup has more than 80 alternative products that have as of September 30, 2007, $61.9 billion in assets. Of the $61.9 billion, Citigroup has $11.5 billion of its own capital invested in these products. Overall, Citigroup has over $2.4 trillion in assets. Citigroup’s alternative-investment group reported a 89% decline in fourth-quarter net income. This resulted in a profit of $61 million as compared to $549 million last year. Citigroup’s Alternative-Investment Group has had a change of the guard. In July of 2007, Vikram Pandit was appointed head of the Group. In December of 2007, Pandit became the Chief Executive of Citigroup and John Havens, a longtime lieutenant of Pandit, was appointed to run the Group.
In June of 2007, the Fund manager, Pickett, placed an order for several hundreds of millions of dollars of leveraged loans that a group of banks were selling in a private auction on behalf of a German media company. The auction was run by seven banks which allocated a bundle of loans to CSO with a cost of nearly $730 million. It is believed that the size of this order exceeded internal trading limits at Citigroup. These investors state that the investment by Pickett would have committed more than half of the Fund’s assets. Pickett tried to back out of the deal stating that the banks changed the terms of the loans after he submitted his bid.
The credit crisis in the financial markets last year was eroding the value of the loans and if CSO took the loans, its performance would substantially suffer. Pickett stated publically that it was his fiduciary duty to investors of the Fund to cancel the order. Pickett recommended that Citigroup sue the banks that had arranged the transaction.
It has been reported that the lead bank on the deal was Morgan Stanley which led a revolt by the banks. A settlement was reached whereby CSO would purchase $746 million of the loans at face value even though the loans were trading at 86% to 93% of their face value. The terms of the settlement were sent in a letter to investors of the Fund. The settlement also required CSO to pay the banks’ legal fees.
By purchasing the loans, CSO reported a 11% loss. Had it not purchased the loans, it would have had a modest gain in 2007. The Fund’s manager Pickett resigned from the Fund on December 12, 2007, following a bitter dispute with Citigroup executives. Michael Micko has taken over as the Fund manager.
As a result of the settlement and the Fund’s poor performance, investors tried to pull their money out of the Fund. In a letter to investors dated January 25, 2008, the new manager Micko stated that the Fund has received a request to redeem more than 30% of the Fund’s assets. As a result, CSO halted redemptions because if the Fund granted the requests, the Fund would have to sell valuable assets at a deep discount. It is believed the Fund now has only $500 million in assets. To stabilize the Fund, Citigroup injected $100 million last month. For 2007, the Fund was down over 11%.
Citigroup has publically stated through a spokesman, Jon Diat, that its Funds are “subject to
comprehensive internal fiduciary risk oversight, risk management practices and senior-level
management supervision.” This statement supports our legal contention of Citigroup’s fiduciary
duty to the Fund and its obligation to properly supervise Pickett and its other employees.
Citigroup’s only defense to an allegation of breach of fiduciary duty is that it carried out its
duties. Pickett may be instrumental in defeating this contention.
Other Funds: Citigroup has other hedge funds that have had poor performances. The Falcon Strategies hedge fund declined 30% in 2007. The Falcon Strategies fund invested in the credit markets. The Old Lane Partners fund which was purchased by Citigroup in July of 2007 posted a loss in January of 2008.