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Citi’s $900 Million Payment Looked Deliberate, Witnesses Say

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Witnesses for Revlon Inc. creditors that received part of a $900 million payment Citigroup Inc. sent in error told a judge they had every reason to believe the transfers were deliberate and the money was theirs to keep.

The bank is suing 10 asset managers for the creditors for refusing to return $508 million of the payments. Representatives of the asset managers testify that the sum matched the debt due them and they had no cause to believe it was a mistake.

Scott Crocombe, managing director at HPS Investment Partners, 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 more than a dozen 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.

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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.

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Citigroup’s witnesses testified on Wednesday, the first day of the trial, that the Aug. 11 payment was clearly an accident, despite controls that required three people to sign off on it. The trial shines a light on an embarrassing bungle that the bank, which was acting as administrative agent on the Revlon loan and made the payment out of is own pocket, 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 sent the $900 million, of which it has recovered about $390 million, 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 HPS, Symphony Asset Management and Brigade Capital Management.

The defense launched its first full day of witnesses on Thursday morning. Among its witnesses is Jeff Frusciante, a bank debt manager for Brigade.

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Frusciante 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.”

At the heart of the breakdown was a system known inside the bank as the “six eyes” approval process, under which three people must be involved in reviewing and executing wire transfers that originate in the asset-based transitional finance group. In the end, none of them caught the mistake until it was too late.

The final set of eyes was Vinny Fratta, a senior manager in Citibank’s global loan operations group, who testified that on reflection he initially thought the disastrous error was due to a technical failure. But “as the day wore on,” Fratta said, “I accepted that the mistake had not been caused by any sort of glitch but rather by human error, and that I was one of the humans responsible for the error.”

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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