May 12, 2008 - The case was voluntarily dismissed.

April 4, 2008 - An investor in shares of Falcon Strategies Two B LLC Hedge Fund (privately traded) filed a lawsuit in the U.S. District Court for the Southern District of Florida against Citigroup Alternative Investments LLC over alleged violations of Federal Securities Laws in connection with certain allegedly false and misleading statements made between September 30, 2005 through January 8, 2008.

According to the complaint, on September 30, 2005, Falcon Strategies Two B LLC Hedge Fund, a Delaware limited liability company commenced operations. Shortly thereafter, Falcon Strategies Two B LLC Hedge Fund entered into an investment management agreement with Citigroup Alternative Investments LLC to provide investment management services for the Falcon Strategies Two B LLC Hedge Fund. Citigroup Alternative Investments LLC is a subsidiary of Citigroup Inc and is registered by the Securities and Exchange Commission as an investment advisor. Following the execution of the management agreement with Citigroup Alternative Investments LLC, Citigroup through its employees, agents, and other personnel began actively marketing shares of Falcon Strategies Two B LLC Hedge Fund to its clients. This included marketing shares through Smith Barney, a subsidiary of Citigroup Inc. The defendants actively marketed Falcon Strategies Two B LLC Hedge Fund as a multi strategy fixed income alternative that promised to provide investors with absolute returns, current income and portfolio diversification. Falcon Strategies Two B LLC Hedge Fund’s philosophy was advertised as utilizing complex arbitrage and hedge strategies that would severely limit risk and generate income for the investor. All of the Defendants understood this was the stated goal and purpose of the Falcon Strategies Two B LLC Hedge Fund. As a result, shares in Falcon Strategies Two B LLC Hedge Fund were actively marketed by the investment advisors of the Defendants in concert with one another to induce investors to purchase shares of Falcon Strategies Two B LLC Hedge Fund. The defendants induced investors by promising an absolute return and an alpha strategy that would provide attractive risk adjusted returns in excess of fixed income. The subscription agreement, provided to each investor, outlined a program that included: (1) A target return of 7% to 10% absolute return per annum over a five year investment horizon and (2) a target volatility of 5% over a five year investment horizon.

However, at all times, Defendants knew and were aware that investment decisions had been made and actions taken by the Falcon Strategies Two B LLC Hedge Fund manager, that created large volatility and risk for the investors. Defendants undertook leveraged fixed income strategies that were far from conservative and were extremely risky which resulted in substantial losses of principle for the investors. During Citigroup Alternative Investments LLC’s management of the Falcon Strategies Two B LLC Hedge Fund, at no time were the high risk investment strategies utilized by the Falcon Strategies Two B LLC Hedge Fund manager disclosed to the investors, including the Plaintiff. In fact, Standard and Poor’s had assigned Falcon Strategies Two B LLC Hedge Fund an S2 volatility rating given its belief that Falcon maintained a low to moderate sensitivity to change in market conditions given its stated investment strategy. An S2 rating is defined by Standard and Poor’s as equivalent to “a portfolio comprised of government securities maturing in 3 - 7 years.”

However, due to the investment/management decisions of the Defendants, Standard and Poor’s changed their rating of the Falcon Strategies Two B LLC Hedge Fund to an S5 on January 8, 2008. A Standard and Poor’s S5 rating indicate the Fund “may be exposed to a variety of significant risk, including high concentration risks, high leverage in investments in structured and/or liquid securities.” This is a much different product than what was purchased by the Plaintiff, and others similarly situated who purchased their funds prior to January 8, 2008. At all times, the Defendants were aware and knew high risk investment and management strategies were being undertaken managing the Falcon Strategies Two B LLC Hedge Fund, but failed to disclose those investment strategies to the existing investors and continued to market the fund as a low risk investment tool to investors. These were material misrepresentations made to the investing public and the Defendants made these representations with scienter and knowledge that the representations were false. Defendant’s motive for undertaking high risk investment strategies with Falcon Strategies Two B LLC Hedge Fund was the generation of exorbitant fees which were tied to total Falcon Strategies Two B LLC Hedge Fund assets. Specifically, all Plaintiffs were charged with a 2 1/2% management fee regardless of performance.

However, in addition to the 2 1/2%, Falcon Strategies Two B LLC Hedge Fund also allowed for an incentive allocation which provided the Defendants, including CIA, an additional fee based on performance.

Therefore, the more money the manager earned for Falcon Strategies Two B LLC Hedge Fund, the higher their compensation. This created an incentive for Citigroup Alternative Investments LLC and the other Defendants to take greater risk with Falcon Strategies Two B LLC Hedge Fund’s assets to try and generate a greater return.