Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling

Citi Loses Bid to Recoup Massive Mistake in Surprise Ruling

(Bloomberg) – Citigroup Inc. unexpectedly lost a legal battle to recover half a billion dollars sent to Revlon Inc. lenders, after an embarrassing rumble that forced it to respond to regulators and tighten its internal controls.

US District Judge Jessie Furman ruled Tuesday that 10 asset managers for the lenders – including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management – are not to return the $ 504 million that Citibank said in August It was accidentally transferred while trying to make interest payments. He said he should not be expected to know that the transfer, which was over $ 900 million by some lenders before he returned his share, was an error. was.

Furman, who presided in Manhattan, wrote, “To believe that Citibank, one of the world’s most sophisticated financial institutions, has made a $ 1 billion mistake, which would have a limit of about $ 1 billion.”

The decision is the latest setback to Citigroup, which is in the midst of a long-term effort to update its underlying controls and technology after slapping regulators with $ 400 million fines for deficiencies in both areas last year. The New York-based company is also undergoing a leadership transition, with Chief Executive Officer Jane Fraser coming to take over the reins on March 1.

Not over yet

“We completely disagree with this decision and intend to appeal,” a spokesman for Citigroup Daniel Romero-Upsilos said in a statement. “We are confident that we are entitled to the funds and will continue their full recovery.”

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

Citigroup briefly made a profit on the news, but its shares were up 0.9% at $ 64.18 at 12:33 pm in New York.

Read more: Citigroup Axis tries to ‘ease pain’ of $ 900 million error

Bloomberg Intelligence senior analyst Elliot Stein said, “The court was constrained by being the ultimate advocate in New York business transactions.” “Nevertheless, this is not the end of the road for this litigation.” In addition to appealing the ruling, the bank “may demand Revlon to withdraw mistakenly transferred funds, resulting in more litigation,” he said.

The decision is a boon for creditors, who are locked in a fight with billionaire investor Ronald Perelman’s struggling cosmetics company over the May reorganization. He argued that the August 11 payment – one of the biggest banking errors in recent memory – settled Revlon’s loan to him under the 2016 loan, which did not look like a mistake when he arrived and to keep his Was. The judge said they could keep the appeal pending, but not spend.

Representatives of the brigade and HPS declined to comment. Symphony did not immediately return messages seeking comment.

Impact on industry

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

Furman said earlier court rulings forced him to conclude that the lenders were entitled to take the money.

He said in his decision, “Principal and interest amount is owed on the loan in transfers.” “The accompanying notices called ’cause’, and the only way in which Revlon was making a major prepayment, which would have been accurate, is called interest.”

The judge said that New York’s top court adopted a “value for discharge” rule nearly 30 years ago that made it clear that banks that transfer wire to creditors should risk losses in case of a mistake, and that Fees for such payments have been reduced. The “disastrous outcome” has not been predicted in the wake of that decision, Furman said, proving the court’s conclusion that transferring banks is the best side to avoid errors.

Read More: Citi had C Six Eyes’ out before $ 900 million blit

Citibank “took that role seriously in adopting a six-eye approval process for that type of wire transfer,” he wrote. “And while this process clearly failed in this instance, the unprecedented nature of the mistake in this case suggests that it was generally successful. In addition, banks and perhaps, after this case, both will take other relatively costly steps to reduce the risk of errors and increase the likelihood of refunding incorrect payments. “

It is not yet clear how Revlon’s current capital structure will be affected by the court’s decision. The debt-laden cosmetics company had earlier said in this case that the money sent to the lenders came from Citibank and not from Revlon’s own accounts. According to Bloomberg data, the 2023 debt is quoted at around 43 cents a dollar, less than half of its face value. Revlon, which was not directly involved in litigation, avoided filing bankruptcy last year.

Read more: Revlon wins approval for debt deal

A representative of Revlon declined to comment.

‘Thumb in devar nose’

At the trial in December, which was conducted by videoconferencing, asset managers officials testified that they had no reason to believe the wire transfer was an error. He said that the amount that was owed to him, and although the loan agreement required three days’ notice for the speedy full payment of the loan – the recipients of the notice were not received – Revlon and the bank previously dissolved the agreement.

The pair “actually had their nose cut” in a reorganization in May, including Scott Nakahara, head of debts at the symphony.

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Carahar described the relationship between the symphony, Revlon and Citibank as controversial and complex.

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

Apparent error

Citibank argued that the transfers were an obvious error and that the firms had no authority over them. Under questioning by a lawyer for the bank, a senior lending operations associate at Symphony testified that it is standard practice to pay attention to fund transfers made without notice and to return the money when it was mistakenly sent. He stated that he had seen the money sent to his firm or earlier counterparts by mistake.

“We will review the wire, confirm it was a mistake” and, if “money was not owed, we will send it back,” we confirmed. Asked if incorrect interest payments were normal, he said they were.

Citi lawyer Revlon loan payment was not a ‘rational’ act

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

The judge wrapped up the six-day hearing on December 16 with a warning.

“The industry must find a way to deal with these things, even if it was a black swan incident,” he said. “Whatever my decision in this matter, I hope the world, the market, is aware of what has happened here and the uncertainties that have occurred.”

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

Read more: Citi trial reveals that Gaffes chain is worth $ 900 million

(Updated with Citigroup’s pledge to appeal and with an analysis starting in the second section.)

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