“You need a pretty big eraser on your pencil for a $900 million mistake.”

Citi Bank, Revlon, and 3 Hedge Funds were involved in a train of events last week. The events moved around the $900 million debacle. One of the biggest bungles on Wall Street in ages, setting all tongues wagging in financial markets.

What was the blunder? Who is to be blamed for the debacle? $900 million debacle. Indeed, a large sum of money. Was it an error? Or was it not? This is a million-dollar question in itself.

THE BLUNDER

Citi Bank was supposed to facilitate a transfer. A transfer which Revlon, an American multinational cosmetics manufacturer, was ought to make to some of its lenders, worth a million dollars.

Citi bank here is an agent on the loan, collecting payments from Revlon and distributing it to their creditors.

What Citi Bank did is instead of passing it on from Revlon’s account, accidentally transferred $900 million from their own funds on August 11, 2020. They stated it to be ‘a clerical error’. What the bank did next was quite obvious. Realizing the mistake committed they asked the receivers to return their money. Luckily, some agreed. Some did not want to part out of their lap of luxury.

And then there was Bridge Capital, a hedge fund. They bluntly spurned to even consider Citi’s request. The early bird caught the worm.

Citi Bank is currently examining how the mistake happened. However, they haven’t offered a public explanation of how the “operational mistake”, as its lawsuits labeled it occurred.

A SNEAK PEEK INTO THE PAST

The goof by Citi Bank took place amid a battle between Revlon and its lenders, just one day after the troubled cosmetics company was sued over its restructuring debt tactics.

Revlon, controlled by Ron Perelman’s MacAndrews & Forbes, was caught up in a legal controversy with a group of lenders including Bridge Capital Management, HPS Investment Partners, and Symphony Asset Management. UMB Bank had sued Revlon on behalf of the lenders, claiming it ‘moved valuable brand assets beyond lender’s reach to benefit of other creditors.’ The bank had also sent a notice of acceleration on the loans, claiming that the company was operating under a default. Revlon was ready to fight the “meritless” suits and stated that UMB was not the agent on the loan and therefore doesn’t have standing.

Revlon’s lenders were urging an immediate payment from Revlon for a loan due several years later on grounds that the company had misused its collateral. There came a time when the market itself was bleak on any refund from Revlon- loans valued at 25 cents to the dollar.

Revlon was facing a tough time amid the Covid-19 hit and facing opposition from companies such as Estee Lauder, saddled with near $3 billion of debt.

SUITS FILED AGAINST HEDGE FUNDS

The blunder by Citi is facing investigation on two fronts- in private talks with regulators and a public fight in the court.

By now, the bank has sued a dozen firms after the blunder they had committed.

According to the bank, several hundred million dollars had already been returned to them. Quite lucky on the bank’s part. However, they need to take legal action to recover over $500 million from lenders who are almost of the fact, “Finders Keepers”. “All of the funds owed to Citi have now either been returned or frozen by court order,” the bank said in the statement. “We believe the law is on our side and that we will recover the outstanding funds.”

The third-largest U.S bank, Citi had filed a lawsuit on August 17 with New York Court against an investment fund, Bridge Capital Management to which they had paid $175 million, and were refused to get it back. In its charge, Citi had stated that it intended to pay $1.5 million in the interest of loan amounting to $174.7 million instead it got $176.2 million and has refused to repay ‘despite crystal-clear evidence that the payments were made in error’. The sum represents 100 times more than what the company was intended to pay.

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

Citi bank also affirmed that Brigade is “well aware that no business … would make such a large prepayment while facing the major financial consequences caused by the pandemic.”

“We think it creates serious issues for the banking industry If players like Brigade can understand, by all accounts, that this was unintentional, that this was a mistake, and can reap a windfall from it,” said Matthew Ingber, who represents Citi.

On August 18, the bank filed suit against HPS Investment and Symphony Asset Management LLC, to recover $127.3 million and $109.7 million respectively. The case is Citibank NA v. HPS Investment Partners LLC and Symphony Asset Management LLC, 20-cv-6617, U.S. District Court, Southern District of New York (Manhattan).

In the latest attempt to repossess its big sum of money which they had mistakenly sent to the creditors of Revlon, Citigroup Inc. filed a third lawsuit on 21st August 2020.

IS IT A VICTORY FOR CITI BANK?

Citi Bank claimed a small victory on August 18 against Bridge Capital when the US judge ordered a hold on the $175 million transfer. The court is considering a ‘preliminary injunction’ that could eventually require the firm to repay Citi.

The next day, the same judge froze $127.3 million and $109.7 million that HPS Investment Partners LLC and Symphony Asset Management LLC were holding respectively. Citigroup is suing these investment funds, which together hold $411.7 million in Revlon debt. So, for now, they can’t withdraw, transfer or dispose of the money, until the court can hear both sides and rule on the matter.

However, the legal proceedings to recover the mistake are likely to take a long time. “A payment error by the nation’s only truly international bank is likely to cause significant questions concerning the systems the bank is using,” says Odeon Capital Group analyst Dick Bove.

Mistakes are inevitable in an industry but this error has undoubtedly raised questions about the bank’s operational flexibility.

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