Citi’s $900 Million Loan Blunder Heads to Regulators and Court

(Bloomberg) -- Citigroup Inc.’s accidental payment of about $900 million to Revlon Inc.’s lenders is facing scrutiny on two fronts -- in private talks with regulators and a public fight in court.

Behind the scenes, the bank has begun briefing watchdogs including the Office of the Comptroller of the Currency and the Federal Reserve about how it mistakenly misdirected so much money, according to people familiar with the matter, who asked not to be identified discussing confidential talks. On Monday, the bank sued Brigade Capital Management LP, seeking to recoup a share of the wayward funds.

Citigroup, the third-largest U.S. bank, hasn’t offered a public explanation of how the “operational mistake,” as its lawsuit labeled it, occurred. While errors are inevitable in an industry that moves trillions of dollars daily, the massive over-payments have captivated Wall Street and raised questions about safeguards within the firm’s franchise tending to syndicated loans.

Citigroup was preparing to resign as administrative agent for the Revlon loan when it accidentally wired roughly $900 million to the lenders’ accounts last week amid a bitter fight between the cosmetics company and creditors. While some opted to return the funds to Citigroup, others including Brigade at least initially refused to give the money back.

Bank regulators aren’t likely to settle the fight over cash. Rather their focus will be on making certain that any lapses at the New York-based company can’t be repeated and that they don’t reveal deeper problems that pose a threat to its stability. Representatives for the bank and regulators declined to comment.

‘Crystal-Clear Evidence’

Citigroup told a federal court in New York that it intended to make interest payments on Revlon’s behalf but transferred amounts more than 100 times greater. Brigade was supposed to receive interest on loan principal of $174.7 million, according to the complaint. It instead got $176.2 million and has refused to repay the funds “despite crystal-clear evidence that the payments were made in error,” Citigroup said, noting the money belonged to the bank, not Revlon.

A representative for Brigade declined to comment on the lawsuit.

Brigade and other lenders including HPS Investment Partners and Symphony Asset Management have been locked in a fight with Revlon over its debt-restructuring tactics. The loan trades for less than 30 cents on the dollar, signaling that investors have dim hopes of getting a full recovery under normal circumstances.

Citigroup rejected Brigade’s contention the money should be regarded as a repayment. Brigade “should have known that a surprise repayment of principal could not be made,” Citigroup said. “And it was well aware that virtually no company, let alone a distressed retail and consumer company such as Revlon, would ever make such a substantial repayment while dealing with the significant financial consequences caused by the ongoing pandemic.”

Citigroup has been adamant in recent years that even as it’s pared spending in other areas, it’s beefed up internal systems and oversight. Amid the coronavirus pandemic, the firm has said it’s focused on making investments to enhance the safety and soundness of the bank.

“We’ll keep managing through this with a sharp emphasis on our risk management,” Chief Executive Officer Michael Corbat said last month. “We continue to make investments in our infrastructure to enhance our safety, soundness and controls to ensure that we have an indisputably strong and stable institution.”

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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