NEW YORK – A federal judge said Tuesday Citigroup Inc was ineligible to get back half a billion dollars of its own money that it mistakenly wired to Revlon Inc’s lenders in what he described as “a banking flaw of perhaps unprecedented nature and size.”
US District Judge Jesse Furman in Manhattan said on August 11, 2020, the transfers are “final and complete transactions that cannot be revoked.”
Citigroup plans to appeal. “We believe that we are entitled to the funds and will continue to seek full recovery of these funds,” said a spokeswoman.
The mistake was Citigroup’s recent internal control misstep, where federal regulators fined $ 400 million ($ 532 million) in October for longstanding deficiencies.
As a loan intermediary for Revlon, Citigroup had transferred $ 893 million to the cosmetics company’s lenders and apparently paid back a loan that did not become due until 2023 when it intended to make an interest payment of only $ 7.8 million.
The New York-based bank blamed human error for the gaffe, and some lenders returned money they received.
However, 10 asset managers, including Brigade Capital Management, HPS Investment Partners, and Symphony Asset Management, turned it down, and Citigroup sued to get back about $ 501 million they had received.
The bank said Revlon lenders knew, or should have known, that the transfers were a mistake and that Revlon, controlled by billionaire Ron Perelman, couldn’t afford such a large payment.
However, in a 101-page ruling following a six-day trial in December, Furman said the remittances provided “relief on value” equal to “the penny” of what lenders owed.
“The non-returning lenders believed and were entitled to believe that the payments were intended,” Furman wrote. “To think otherwise – to believe that Citibank, one of the most advanced financial institutions in the world, made an unprecedented mistake of nearly $ 1 billion – would have been borderline irrational.”
Furman has put a temporary ban on the lenders’ use of the transferred funds, reflecting Citigroup’s expected pull.
In a joint statement, the lenders’ attorneys Adam Abensohn and Robert Loigman said they were “extremely pleased” with the decision.
Management agents typically distribute interest payments and perform back office services for customers.
Industry groups said a ruling against Citigroup could expose banks to excessive liability risks.
The Loan Syndications and Trading Association, which includes around 530 members including Citigroup and some Revlon creditors, said such a decision could destabilize the $ 1.2 trillion syndicated loan market.
Shortcomings in Citigroup’s internal controls were a factor in Chief Executive Mike Corbat’s planned early retirement this month.
The case is In re: Citibank Aug 11, 2020 Remittances, U.S. District Court, Southern Borough of New York, No. 20-06539.