Making money the old fashioned way...

1980s Smith Barney "icon", John Houseman

Since confidence games have no doubt been with us since history has been written, it seems that Smith Barney has indeed been making money "the old fashioned way."

Several high-end investors have just won $54.1 million in civil arbitration against the company (a division of Citigroup) - including over $17 million in punitive damages - for a municipal bonds leveraging scheme that made a lot of money for the company but was a disaster for people who apparently believed they were putting their wealth into a safe municpal bonds haven.

According to Gretchen Morgenson at The New York Times:

Requiring a minimum investment of $500,000, the deals employed the wonders of leverage, borrowing 8 to 10 times the value of the municipal bonds in an underlying portfolio to generate higher income. Calling the strategy conservative and ideal for investors’ safe money, Smith Barney sold the trusts to wealthy investors...

Smith Barney’s sales representatives kept 40 percent of the total fees paid by their investors, far exceeding what they would have earned selling ordinary municipal bonds. This arrangement encouraged Smith Barney to lever up the portfolios...lawyers argued, putting the interests of their clients and those of Smith Barney at odds...