Citi Judge Issues ‘Black Swan’ Warning to Bankers as Trial Ends
Citi Says Firms Never Booked Mistaken Payment and Must Return It
(Bloomberg) -- Citigroup Inc. urged a federal judge to make a set of Revlon Inc. lenders return half a billion dollars it accidentally sent them in August, as a weeklong trial drew to a close.
U.S. District Judge Jesse Furman in Manhattan wrapped up the trial, over the biggest bank error in recent memory, with a stern warning to Wall Street.
“The industry should figure out a way of dealing with these things even if this was a black swan event,” he said. “Whatever my ruling is in this case, I hope the world, the market takes notice of what’s happened here and the uncertainties that have resulted.”
Furman said he would issue a decision as soon as possible, keeping in mind the coming holidays.
Citibank wired a total of $900 million, the full amount of the Revlon loan, on Aug. 11 while trying to make a far smaller interest payment. Acting as administrative agent on the loan, it made the whopping payment out of its own pocket. It recouped almost $400 million and sued 10 asset managers for lenders of the cosmetics company to get the rest back, arguing they knew the payment was in error.
‘It Was Strange’
“This was an unexpected, unscheduled payment that wasn’t permitted under the credit agreement from a company that a few weeks earlier had disclosed” it had less than $400 million in cash, Christopher Houpt, a lawyer for the bank, told the court in closing arguments on Wednesday, referring to the struggling makeup company.
“That doesn’t mean it’s impossible for them to pay off their debt, but as every defendant said, it was strange,” Houpt said. “You had people trying to track down the notice, find out what the payment is. There were discrepancies that would have led a normal person to investigate, and that would mean they were on notice at time of payment.”
He pointed to testimony from Catherine McCoy, a portfolio manager with Allstate who said she immediately wondered if the payments were a “mistake,” as evidence that the investment managers at least should have considered the possibility.
Houpt told the judge that the investment firms did nothing to apply the transfers to their Revlon debt once the money landed in their accounts, took active steps to stop the payments from being booked and are still calculating fees and interest as if the loans have not been satisfied.
‘Mere Bookkeeping’
“None of them did anything to apply the funds,” he told Furman. “They didn’t book it to their own accounts. They told others not to book the money.”
The managers claim that because the wire transfers were effectively a full paydown of their clients’ Revlon debt, they treated the payment as such and are entitled to keep it.
Adam Abensohn, a lawyer for the firms, said the final settling of the accounts at the end of the day is “mere bookkeeping” and that they considered the loans paid off when they received the money.
“There were various administrators and trustees that in fact did apply the money,” Abensohn argued. “If one were trying to do a catalog of which ones did and which ones didn’t, it wouldn’t be a simple task. In the wake of this transaction, there is zero balance across every single term loan.”
He said “the obligation that exists on Citi is for something to happen at the moment of transfer that makes it utterly apparent it’s a mistake.”
The trial, which began last Wednesday, was held by videoconference without a jury.
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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