Citigroup wins appeal over $500mn wired by mistake

A US appeals court has overturned a ruling that allowed hedge funds to keep half a billion dollars that Citigroup mistakenly sent to them, in a victory for the Wall Street bank that could enable it to recoup the money.

Citi accidentally wired $900mn to creditors of the Revlon cosmetics company in August 2020. A group of funds that held about $500mn of the term loan refused to return their share of the funds. A federal district court judge upheld their position, ruling last year that the law allowed creditors to keep the money because, in part, they had no reason at the time to believe the payment was mistaken.

On Thursday, judges at the 2nd Circuit US Court of Appeals in New York rejected the district judge’s rationale and sent the case back to the lower court to rule again based on its guidance.

The hedge funds, which include Brigade Capital Management and HPS Investment Partners, “are not shielded from Citibank’s claims for restitution”, the appeals judges wrote, noting that they were aware of “red warning flags consisting of facts suggestive of accident or mistake”.

The ruling indicated “the circumstances were suspicious enough that the lenders should have picked up the phone to check with Citigroup, and had they done so they would have quickly learned that the payment was a mistake”, said Eric Talley, a Columbia Law School professor who had submitted a friend-of-the-court brief arguing that the district court judge had ruled incorrectly.

Uncertainty over the $900mn payment had roiled business at Revlon, which filed for bankruptcy in June in the midst of a supply chain crunch. The company told the bankruptcy court that its efforts to raise fresh capital were disrupted by its inability to identify all its creditors because of the litigation over Citi’s payment.

Citi itself had argued in the bankruptcy court that should it not get the $500mn back, it had the right to become a Revlon bankruptcy claimant for that amount.

The bank on Thursday said the appeals court ruling reaffirmed the view that the transferred funds should be returned.

“While Citi has taken steps to reduce the likelihood of such an error in the future, today’s decision provides welcome stability and upholds the concept of co-operation needed for a well-functioning syndicated lending market,” the bank said.

Lawyers for the funds that kept the disputed $500mn did not immediately respond to requests for comment.

Citi’s wire error put a spotlight on technology infrastructure at the bank. It was followed later in 2020 by a $400mn fine from US bank regulators over deficiencies in risk and control systems. In a consent order agreed to by the bank, the Federal Reserve ordered the group to upgrade its processes and its technology.