Citi’s $900 Million Flub Spurs Grilling at Closely Watched Trial
Citi’s $900 Million Payment Looked Deliberate, Witnesses Say
(Bloomberg) -- A witness for Revlon Inc. creditors that received part of a $900 million payment Citigroup Inc. sent in error took a grilling on Thursday in a trial over the bank’s effort to get the money back.
Jeff Frusciante, a bank debt manager for Brigade Capital Management, had testified that he couldn’t understand how Citigroup could have sent the sum by accident. During a contentious cross-examination, he defended his claim that he thought the August transfer was an early full paydown of the loans plus interest.
“Do you still believe that Citibank intended to make a full paydown on Aug. 11?” John Baughman, a lawyer for the bank, asked him.
“I still haven’t got a good answer as to how this happened,” Frusciante said, in part.
“Can you think of any reason why Citibank would send out approximately $900 million on Aug. 11 and the next day send out notices saying, ‘We made a mistake, please give it back?’” Baughman pressed. “Why would they do that?”
“I have no idea,” Frusciante said. “I don’t work for Citi.”
Their Money
Citigroup, which has recovered about $390 million of the transfer, has sued Brigade and nine other asset managers for the Revlon creditors that have held on to $508 million of the payment. The bank, which made the transfer out of its own pocket, was acting as administrative agent on the Revlon loan.
The defendants say they should be allowed to keep the money, since they were already owed it. Because the sum matched the debt due them, they argue, they had no cause to believe it was a mistake.
The defense launched the first full day of its case after Citigroup finished presenting its witnesses late Wednesday, the first day of the trial. The bank argues that the payment was bristling with signs it was a mistake. The trial shines a light on an embarrassing bungle that Citigroup has already had to explain to federal regulators. The case, over one of the biggest banking errors in recent memory, is being closely followed on Wall Street, especially in the syndicated loan industry.
Citigroup says it accidentally wired the huge sum while trying to make a periodic interest payment, including to some creditors that had been locked in a battle with Revlon over the debt restructuring. The creditors say the transfers were the exact amount owed their clients under the 2016 loan to Revlon and that nothing about the payment led them to think otherwise. Among the 10 firms the bank sued are Brigade, Symphony Asset Management and HPS Investment Partners.
‘Any Logical Reason?’
During his cross-examination on Thursday, Brigade’s Frusciante said he had “no idea the inner workings of Citi, but I do know how wire approvals go.”
Baughman asked him to offer “any logical reason” Citigroup would have approved the transfer.
“I understood what it was. Citi is contending it wasn’t that,” Frusciante said. “It doesn’t make sense. You don’t pay interim interest without an amendment. There had to be some principal activity.”
Scott Crocombe, managing director at HPS, said in a declaration filed with the court -- a form of testimony being used in the trial instead of live direct examination -- that his firm’s personnel gave no indication to him that the payment was an accident. Crocombe said he would never have considered it one if he hadn’t received Citigroup’s notice of a payment error almost 20 hours later.
HPS acts an investment manager for 18 clients that hold about $134.1 million of Revlon’s 2016 term loans, according to the filing. Crocombe said he considered the reasons Revlon might be paying off some loans, including an ongoing dispute with certain creditors over the cosmetics company’s May debt restructuring, which favored some investors over others.
50% Threshold
By “paying off or purchasing” the 2016 loans, Revlon could reduce the amount of borrowings below a 50% ownership threshold required to file a lawsuit against the company, Crocombe said in the declaration. That suit is separate from the one Citigroup brought against the asset managers to recover the money, the subject of the current trial.
An intentional early full payment of the loan was also plausible if Revlon had raised additional capital to pay off its loan obligations, Steven Abrams, a managing director and portfolio manager at Greywolf Capital Management, told the court. Revlon had raised more than $800 million in May “despite reported liquidity constraints,” Abrams said.
John Greene, a partner and portfolio manager with Bardin Hill Investment Partners, testified that he thought the transfers were a full paydown of the 2016 Revlon loans and didn’t even consider the possibility that they were a mistake until he got the error notices almost a day later.
Greene said he was “surprised” by the payment but immediately thought it was related to the suit against Revlon, which he figured may have “caused Mr. Perelman or one of his portfolio companies to kick in money to pay off the 2016 term loan.” Ronald Perelman is the billionaire whose holding company MacAndrews & Forbes owns more than 80% of Revlon.
Improbable Blunder
Greene said he didn’t realize right away that Citigroup had repaid all the creditors, and reckoned Perelman “was trying to ‘pick off’ smaller lenders” to prevent a majority from authorizing the suit against Revlon.
Frusciante, of Brigade, told the court in his declaration that even after Citibank notified recipients that it was an error, “it seemed more plausible that the payments were intentional than that one of America’s largest banks accidentally paid off our loans down to the penny.”
The trial is being held by videoconference, without a jury, before U.S. District Judge Jesse Furman in Manhattan, who will determine the outcome.
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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