Behind the Back-Office Blunder That Cost Citigroup $500 Million
(Bloomberg Businessweek) -- Fat-finger errors can happen at even the biggest financial companies. There was the time, three years ago, when Deutsche Bank sent €28 billion ($33 billion)—more than its entire market value—to one of its outside accounts. Such mishaps typically result in major embarrassment, but are quickly reversed.
Then there’s the latest saga involving Citigroup Inc., where a human error forced it into a showdown with some of its most aggressive clients. The bank mistakenly paid almost $900 million to creditors of troubled lipstick maker Revlon Inc., the crown jewel of billionaire Ronald Perelman’s business empire. The error has forced Citigroup to restate fourth-quarter earnings and do a good deal of explaining in front of regulators. And the bank could ultimately be out more than $500 million.
Citigroup’s fight to recoup the funds also laid bare the vitriol and resentment that’s built up in the credit market, where institutional investors provide funding to companies, with banks acting as middlemen, and contract disputes are part of the game. In this case, some funds got money they felt they were owed by Revlon and decided to hang onto it—even though it was Citigroup’s money, not Revlon’s.
None of those ramifications were apparent to the three back-office employees at the origin of the wayward transfer. On a Tuesday evening last August, two Citigroup contractors based in India and one of the bank’s own senior managers in Delaware were preparing to process a $7.8 million interest payment on a Revlon loan.
As one of the largest arrangers of corporate loans, Citigroup had distributed hundreds of interest payments to third-party lenders in the past. It’s a clerical role that doesn’t generate meaningful fees for the bank but typically paves the way to future deals.
A quirk made the Revlon transaction less routine. One of the investment firms that owned a portion of the loan had agreed to exchange its stake for a chunk of a different Revlon loan and needed to be paid interest that had accrued up to that point. It wasn’t a maneuver that Citigroup’s systems were designed to handle, but the bank had a workaround. It involved moving the principal of the loan temporarily into one of the bank’s own accounts and then recreating the loan to reflect that the creditor would no longer own a piece of it.
What the employees didn’t realize that Tuesday evening was that by failing to check two boxes in the byzantine software Citigroup uses to execute payments, they’d authorized the entire principal on the loan—about $894 million—to be paid to the creditors with the bank’s own money. Wire transfers of that size require the approval of three people, but no one handling the Revlon payment became aware of the mistake until hours after it had been distributed. “Bad news,” the Citigroup manager in Delaware wrote in a Skype chat to his superior the next morning. “Principal out the door when it was supposed to be sent to wash for Revlon structure.”
To make matters worse, the money could hardly have ended up in more hostile hands. Several of the creditors that had received the payments—including Brigade Capital Management, HPS Investment Partners, and Symphony Asset Management—had been embroiled in a bitter fight with Revlon and Citigroup over debt deals Revlon had made to improve its financial position and stave off a default.
Brigade, HPS, and Symphony had accused Revlon of violating the terms of its loan agreement by pledging some of its intellectual property, including trademarks, as collateral for new debt. In the eyes of these funds, this put some of Revlon’s most valuable property out of their reach in the event of a bankruptcy. The investors also had made little secret of their antipathy for Citigroup, which they faulted for facilitating the move and for helping Revlon secure a new credit line from a lender sympathetic to Revlon management that would side with the company in disputes among creditors.
Once a mainstay of beauty aisles, Revlon had struggled to remain relevant in an era dominated by smaller companies promoted by Instagram influencers. The loan Citigroup had just repaid in full had been trading at less than 30¢ on the dollar, reflecting the high probability of a default.
Surprise quickly gave way to mockery among Revlon creditors as news of the payment—and notices from Citigroup demanding the money be returned—started to hit their inboxes. “Downside of work from home,” a portfolio manager at HPS quipped in a chat message among HPS employees. “Maybe the dog hit the keyboard.”
“How was work today, honey?” the same person wrote, imagining both sides of a dinner table conversation. “It was OK, except I accidentally sent $900 million out to people who weren’t supposed to have it.”
Some creditors agreed to return the funds, allowing Citigroup to recoup about $400 million. But in spite of numerous requests from the bank, HPS and almost a dozen other creditors refused to budge, arguing that they were entitled to keep the cash. “We were just paid money that we were owed by a borrower and an agent who were involved in a significant game of chess,” Scott Caraher, head of loans at Symphony Asset Management, told a U.S. District judge when Citigroup went to court to get the money.
The judge, Jesse Furman of the Southern District of New York, has sided with the creditors, arguing that there was no way for lenders to determine the funds had been wired by mistake. The content of chat messages written by the HPS and Citigroup employees, some of which took place on a platform operated by Bloomberg LP, which owns Bloomberg Businessweek, were disclosed as part of the court proceedings. Citigroup is appealing the decision and has asked that the court keep the money frozen while the dispute continues. In a statement, it said the firms had “mistakenly received a windfall.”
Months later the consequences are still being felt. Citigroup has burned bridges with the firms that have refused to return the money. It’s excluding them from new debt sales and has refused to help some of them package their corporate loans into securities for other investors to buy.
It’s not surprising that the dispute between Citigroup and the investment firms couldn’t be amicably resolved. Brawls among borrowers and investors got dirtier and uglier than ever during the pandemic, as cash-strapped companies teetered on the brink of restructuring. The increasingly complex nature of loan and bond agreements, which critics say are riddled with loopholes, has made debt investing more than a matter of yields and credit quality. It’s a fight for the legal upper hand.
“We all know that these docs have really become Swiss cheese,” says Chad Valerio, a portfolio manager at Onex Credit Partners, which isn’t involved in the Revlon dispute. “When a company is backed up against the wall and when a sponsor is trying to figure out how to extend their option, or a creditor is trying to figure out how to get a better outcome for themselves, people are going to get really creative and do what they have to do.” —With Jenny Surane
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