Banking

Citi loses bid to recoup massive mistake in surprise ruling

Citigroup unexpectedly lost a legal battle to recover half a billion dollars it sent Revlon lenders, after the embarrassing blunder forced it to answer to regulators and tighten its internal controls.

U.S. District Judge Jesse Furman in New York on Tuesday ruled that 10 asset managers for the lenders — which include Brigade Capital Management, HPS Investment Partners and Symphony Asset Management — don’t have to return more than $500 million that Citibank said it mistakenly transferred in August while trying to make an interest payment.

Patrick T. Fallon/Bloomberg

Furman found that the asset managers shouldn’t have been expected to know the transfer was an error. “To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion would have been borderline irrational,” he wrote.

Furman’s decision is the latest blow for Citigroup, which is in the midst of a yearslong effort to update its underlying controls and technology after regulators slapped it with a $400 million fine for deficiencies in both areas last year. The firm is also undergoing a leadership change, with incoming Chief Executive Officer Jane Fraser set to take the reins on March 1.

Boon to creditors

“We strongly disagree with this decision and intend to appeal,” Danielle Romero-Apsilos, a spokeswoman for Citigroup, said in a statement. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them.”

Robert Loigman of Quinn Emanuel, the law firm representing the investment firms, said the firm was “extremely pleased with Judge Furman’s detailed and thorough decision.”

Revlon declined to comment.

Citigroup briefly pared gains on the news, but its shares were up 1.2% to $64.39 at 10:23 a.m. in New York.

The decision, which Citibank will almost certainly appeal, is a boon to the creditors, which have been locked in a battle with billionaire investor Ronald Perelman’s struggling cosmetics company over its May restructuring. They argued that the Aug. 11 payment —
one of the biggest banking errors in recent memory —
settled Revlon’s debt to them under a 2016 term loan, didn’t look like a mistake when it arrived and was theirs to keep.

The creditors sued Revlon the day after the errant wire transfers, alleging that the makeup company siphoned off collateral for a $200 million loan it secured in 2019 as it lost market share. They dropped the suit in November, reserving the right to refile it, pending the outcome of the Citibank litigation.

Lasting impact

The ruling could also have a lasting impact on the role administrative agents play in the syndicated loan industry by exposing them to higher operational and regulatory risks.

Furman said prior court decisions forced him to conclude that the lenders were entitled to take the money because they were not aware that Citibank had make a mistake when it sent the funds.

“The transfers matched to the penny the amount of principal and interest outstanding on the loan,” he said in his decision. “The accompanying notices referred to interest being ‘due,’ and the only way in which that would have been accurate was if Revlon was making a principal prepayment. And it appears that no mistake of the size or nature of Citibank’s had ever happened before.”

The lenders can keep the money, pending any appeal by Citibank, but can’t spend it, the judge said.

A representative of HPS declined to comment. Brigade and Symphony didn’t immediately provide comment.

Looked intentional

At the trial, which was held by videoconference, executives of the asset managers testified that they had no reason to believe the wire transfers were an error. They said the sum was what they were owed, and although the credit agreement required three days’ notice for an early full payment of the loan —
notice the recipients didn’t get —
Revlon and the bank had breached the agreement before.

The pair “had really thumbed their nose” at the pact, including in the May restructuring, Scott Caraher, head of loans at Symphony, testified.

Caraher described the relationship between Symphony, Revlon and Citibank as contentious and complicated.

“It’s not that we didn’t want to return the money,” he said. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess.”

Clear error

Citibank argued that the transfers were a clear error and that the firms had no right to them. Under questioning by a lawyer for the bank, a senior loan operations associate at Symphony testified that it’s standard practice to look into fund transfers made without notice and to return the money if it was sent in error. He said he had seen money sent by mistake to his firm or to counterparties before.

“We would review the wire, confirm it was a mistake” and, if “money was not owed, we would send it back,” he testified. Asked whether mistaken interest payments were common, he said they were.

The error was a painful lesson for the bank, which had to explain it to the Office of the Comptroller of the Currency and the Federal Reserve.

The judge wrapped up the six-day trial on Dec. 16 with a warning.

“The industry should figure out a way of dealing with these things even if this was a black swan event,” he said. “Whatever my ruling is in this case, I hope the world, the market takes notice of what’s happened here and the uncertainties that have resulted.”

The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).



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