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Citigroup mocked by asset managers on $900-M error: ‘Take the money and run’

RECIPIENTS of Citigroup, Inc.’s $900-million error couldn’t help but mock the bank — and that could help it get the money back.

As it fights to recover funds it sent Revlon, Inc. lenders in August, Citibank is working to convince a judge that the 10 asset managers it’s suing knew the payment was a mistake. At a trial on Monday, lawyers for the bank cited electronic chats between employees of some of the investment firms as evidence.

“I feel really bad for the person that fat-fingered a $900-million payment,” a vice-president at HPS Investment Partners told another executive the day after the Aug. 11 transfers, according to an excerpt highlighted in court. “Not a great career move.”

“How was work today, honey?” the vice-president said a little later, imagining both sides of the dinner table conversation that night at home. “It was OK, except I accidentally sent $900 million out to people who weren’t supposed to have it.”

By Aug. 14, after major news media had reported the bungled payment, another HPS vice-president was discussing the transfer with a third, and riffed on the title of a 1970s hit by the Steve Miller Band, according to a court filing by Citibank.

“As Steve Miller said, ‘take the money and run,’” he quipped.

The response came with a smiley face: “We have not paid the money back :).”

However embarrassing to Citibank, the mocking chatter at HPS in the wake of the biggest banking error in recent memory could work in its favor. The bank, acting as administrative agent on the Revlon loan, wired the $900 million out of its own pocket. It argues that the lenders must return the money since it was clearly sent in error and isn’t theirs to keep. It has cited the language to show the firms knew it didn’t mean pay off the Revlon loans.

The trial, which is being held by videoconference without a jury before US District Judge Jesse Furman in Manhattan and is in its fourth day, shines a light on a mistake that Citibank has already had to explain to federal regulators and that has forced it to tighten its controls. The case is being closely followed on Wall Street, especially in the syndicated loan industry.

Citibank, which meant to make a far smaller periodic interest payment, has recovered about $390 million of the whopping error and sued asset managers for creditors that refused to give back $508 million.

The defendants say the transfers were the exact amount owed their clients under a 2016 loan to the struggling cosmetics company and that nothing about the payment led them to think it was a mistake. Among the 10 firms the bank sued are HPS, Symphony Asset Management, Brigade Capital Management and New Generation Advisors.

Frederick Bailey Dent, an equity member and portfolio manager at New Generation, initially advised his team to return the wires and keep only the funds that were due, according to written testimony. But in subsequent internal messages read out in court on Monday, Mr. Dent said “wait” and told his team to hang on to the money — though he added that the firm “probably can’t recognize the gain until we’re sure we can keep it.”

Scott Crocombe, managing director at HPS, testified that he took part in discussions at the firm of the huge unexpected transfer the day after HPS received it. Under questioning by John Baughman, a lawyer for Citibank, Mr. Crocombe said he didn’t know about the payment until learning of an error notice the bank sent out almost 20 hours later.

The judge, who will determine the outcome of the case, asked Crocombe to explain his thinking on why Revlon would pay off the loan rather than make a much smaller payment on unsecured bonds outstanding that triggered a November due date.

“There are situations in which a borrower or management, or the board of a borrower, if they become concerned about preference payment issues,” would make the decision to pay secured debt, Mr. Crocombe said.

HPS manages investments for 18 clients that hold about $134.1 million of Revlon’s 2016 term loans, according to a filing Mr. Crocombe made with the court.

The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, US District Court, Southern District of New York (Manhattan). — Bloomberg

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