The market had just opened in New York when Arokia Raj knew he had a problem.
A contractor in India for Citigroup Inc.’s Citibank retail business, Raj had been the “checker” on a periodic interest payment to a group of Revlon Inc. creditors, with the bank acting as administrative agent on the loan. Suddenly he realized that Citi had instead sent some of those creditors the full remaining principal.
“Bad news,” his supervisor told the head of North American loan operations by chat on Aug. 12. It was, in fact, $900 million of bad news.
Raj will testify this week by videoconference in federal court in Manhattan as Citibank goes to trial to recover the more than $500 million it still hasn’t gotten back from the defendants, asset managers including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management. Unless there’s a last-minute settlement, the trial -- over one of the biggest banking errors in recent memory -- will be closely watched on Wall Street, and its outcome could have a significant impact on the industry.
Representatives for Brigade and Symphony declined to comment on the case. A representative for HPS didn’t immediately provide comment outside of business hours.
‘Shot Across The Bow’
Citibank argues that because the funds were its own, not Revlon’s, and were transferred in error, they must be returned. To Revlon creditors already locked in a bitter fight with the cosmetics giant over its restructuring earlier in the year, the money satisfied a debt, and they should be allowed to keep it.
Citibank has “a pretty strong case,” said Eric Talley, a professor of corporate law at Columbia Law School, but it’s “not so crystal clear that it doesn’t involve a little bit of risk.” The outcome will likely hinge on the creditors’ contention that they got what they were entitled to, he said.
If they prevail, Talley said, it could be “a shot across the bow” of the big commercial banks, signaling that they won’t be able to get courts “to ride to the rescue to salvage an error that you committed because of poor internal controls.”
Meanwhile Citi, which has had to explain the embarrassing error to the Office of the Comptroller of the Currency and the Federal Reserve, already has “a little bit of a black eye,” Talley said. Even if the bank wins, he said, “it would be an overshoot for Citibank to pop the champagne corks and say we’re vindicated after all.”
Citigroup said it would do better.