Advisers go against Citigroup dissidents


Dissident shareholders waging proxy fights at mutual funds to be transferred from Citigroup Inc. to Legg Mason Inc. were dealt a blow yesterday when independent advisers sided against them.

Two investment firms are urging fellow shareholders in six of Citigroup's funds to vote against new management agreements, which would be required once the $3.7 billion deal with Legg Mason is complete. Baltimore-based Legg Mason agreed in June to swap its brokerage business for Citigroup's mutual funds and other assets.

The influential Institutional Shareholder Services, which gives advice to pension funds and other large investors on how to vote on proxy issues, said Citigroup fund investors should approve the management agreements. Not doing so might lead to "significant uncertainty for the fund and its shareholders," ISS said in an analysis. Another advisory firm, Glass Lewis & Co., also recommended that investors cast their ballots for the agreements.

While the typically pro-forma vote needed for a smooth transition has been complicated by opposition from the investors, the fight has nothing to do with the Legg Mason-Citigroup deal per se. Instead, the investors, Elliott Management Corp., a hedge-fund firm, and Karpus Investment Management, say they are using the vote to shed light on unrelated complaints about the value of their holdings. Officials at both firms said yesterday they were undeterred by the ISS and Glass Lewis recommendations.

The six closed-end funds in question represent a fraction of the 200 Citigroup funds being transferred to Legg Mason, or about $3 billion of $437 billion in assets.

Elliott and Karpus want managers of the closed-end funds to take steps to eliminate the "discount" on the market price of their shares. Closed-end funds differ from traditional mutual funds because they are traded on an exchange like stocks, so the share price could fall below the actual value of the underlying investments. Elliott says shareholders in the Salomon Brothers Fund deserve to have more than $200 million, or about $2 a share, returned to them.

The majority of closed-end funds trade at a discount, according to ISS, and they have other advantages such as lower fees.

ISS pointed out that certain investor groups "have found it profitable to attack" closed-end funds. "By becoming shareholders and placing their proposals on fund ballots, hedge funds and arbitrageurs seek a quick, one-time profit," ISS said, without naming Elliott or Karpus.

Citigroup has sent additional materials to fund investors to explain its position, calling the issue raised by the dissidents a "side show." The New York-based company had to go directly to shareholders when the New York Stock Exchange ruled that brokers couldn't cast ballots without first getting instructions from clients.

Despite the proxy battles, Citigroup still expects that the deal will close in the fourth quarter. A special meeting to tally the votes is set for next week.

"Citigroup is committed to ensuring that shareholders of the contested closed-end funds understand the benefits of the Legg Mason transaction," spokeswoman Mary Athridge said.

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