It was around 9 a.m. on Aug. 12 when Arokia Raj first realized that something had gone terribly wrong.
Raj, a member of a Citigroup team that processes and services asset-based loans, was reviewing the previous day’s transactions when he noticed large gaps in the numbers — a discrepancy just under $900 million.
Raj quickly put two and two together: The figure matched, down to the decimal point, the outstanding principal balance on a loan that the beauty company Revlon had taken out nearly five years ago.
With a few fatal clicks, Raj had mistakenly sent Revlon’s lenders not just the accrued interest of less than $8 million, as intended, but also the total outstanding principal.
Those clicks started a cascade of events that began with Citigroup mistakenly wiring $900 million to a group of asset managers who had floated money to Revlon, wound through various court battles as Citigroup tried to recover the money, and ended Tuesday with a decision that shook the foundations of Wall Street.
Judge Jesse Furman of New York said the lenders could keep the $500 million that hadn’t been repaid to Citibank. The bank has recovered the remaining $400 million.
Insider took a look at the 101-page decision to lay out exactly how, as Judge Furman called it, one of the “biggest blunders in banking history” — and its $500 million price tag — unfolded.
Citigroup has long struggled against technology. Its systems are a patchwork built up over dozens of mergers that never got knitted together.
One of the largest government bailouts in the financial crisis went to Citigroup thanks to an ill-timed push into mortgage securities and an inability to see all of the firm’s exposures at once. The tech would also prove key in Michael Corbat’s decision to retire as CEO of Citigroup last year after regulators grew tired with his inability to fix risk, compliance, and technology systems, Insider has previously reported.
This particular story begins in 2016, when Revlon, the cosmetics darling of drugstores, took out a seven-year, $1.8 billion loan from a group of lenders after it bought the beauty company Elizabeth Arden for $870 million earlier that year. Revlon tapped Citibank as its administrative agent, charged with distributing interest payments and performing back-office services on its behalf.
In the spring of 2020, Revlon, facing a liquidity squeeze, sought to undergo a restructuring and raise another $800 million-plus in debt financing. Revlon’s creditors, however, saw the move as an effort to “siphon away” the collateral for their loans. They sued the cosmetics company and asked Citibank to resign its duty, alleging that it was helping Revlon with a controversial debt restructuring.
Citibank’s ‘six-eye’ failure
On August 11, Citibank prepared to send interest payments to Revlon’s creditors. The lenders weren’t expecting these payments, which fell outside of the usual repayment schedule and were being sent as a result of some lenders making changes in their positions from the 2016 loan.
At around 4 p.m. Citibank’s Asset-Based Transitional Finance (ABTF) team was instructed to “pay the Principal to the Wash Account when accrued interest is processed.” A wash account is also known as a clearing account, and is where Citi temporarily holds money during transfers to ensure it doesn’t leave the bank.
Approximately an hour later, the ABTF team, which processes and services Citibank’s asset-based loans, was given the green light to send out the interest payments to the lenders.
According to testimony from Raj, the employee who would later discover the discrepancies, whenever the ABTF team processes this type of transaction, it must create an interest schedule, draft invoices for the lenders, and input payment instructions in Flexcube, the software Citibank uses for to execute wire payments.
Transactions are also subject to Citibank’s “six-eye” approval procedure: three people must review and approve the transaction before execution.
The first person that day, called the “maker,” was Santhosh Kuppusamy Ravi, who inputted the payment information into Flexcube. Ravi checked off the “PRINCIPAL” box on Flexcube, believing that this would send the principal to the wash account.
Raj was the second pair of eyes as the “checker,” reviewing and verifying the information before the “approver,” in this case Vincent “Vinny” Fratta, the head of the ABTF group, made a final check.
What all three people didn’t realize, however, was that they’d needed to check off two other boxes on Flexcube: the “FRONT” and “FUND,” as delineated in Citibank’s manual. Otherwise, the total amount — including the principal — would automatically be released as wire payments.
By 6 p.m. that evening, the money was out the door.
Discovering the error
The next morning on August 12, Raj was reviewing the previous day’s transactions when he discovered that a total of more than $900 million — not the roughly $8 million of intended interest payments — had been sent to the lenders.
After Raj alerted the team lead, Fratta opened up Skype and broke the news to his supervisor, Vincent Farrell, the head of Citi’s North American loan operations.
“Bad news,” Fratta wrote. “Principal to wash, wires look like they went out the door.”
He followed up a few minutes later. “Yup, confirmed. Principal out the door when it was supposed to be sent to wash for Revlon restructure.”
Fratta, still not realizing that human error had brought this about, thought that there was a software error. He emailed Citibank’s tech support group: “Flexcube is not working properly, and it will send your payments out the door to lenders/borrowers.”
Over the course of the day, the truth of what had really happened finally dawned on them.
At 2:25 p.m. Citibank began sending recall notices to the lenders. It sent a second set at 6 p.m., a third set the next day, and several more thereafter.
‘Could this be a mistake?’
Revlon’s lenders outsource the job of managing the funds and overall portfolio to asset managers. Those asset managers, including Allstate, HPS Investment Partners, and Symphony Asset Management, among others, weren’t expecting the payment and they were perplexed when they first saw the unexpected — and huge — payments from Citibank on the mornings of August 12 and 13.
“So strange — could this be a mistake?” an Allstate portfolio manager asked her colleague when she was notified of the payment. “Not sure if this is in error, seems very unlikely.”
A Bardin Hill partner and portfolio manager testified that the thought of an established institution like Citibank making such a huge blunder “literally never crossed my mind. I still find it kind of mind-blowing in general.”
The news quickly spread among the asset managers’ employees. “How was work today honey? It was ok, except I accidentally sent $900mm out to people who weren’t supposed to have it,” quipped an HPS employee in a Bloomberg chat to a coworker. “Downside of work from home. Maybe the dog hit the keyboard.”
“The song ‘Had a Bad Day’ playing [in] the background,” their coworker replied.
Everyone, it seemed, was wondering the same thing: How, exactly, had Citibank made such a massive, “mind-blowing” mistake?
‘Do not return any funds’
Despite the notices, the lenders’ asset managers instructed their clients to hold onto the funds they’d received.
“Revlon full paydown?” a bank debt manager at Brigade Capital wrote to its general counsel.
In instances where they had returned some of the money, the asset managers quickly directed their analysts to “claw back” the funds.
“PLEASE DO NOT RETURN ANY FUNDS RELATED TO REVLON,” an analyst at Greywolf Loan Management emphasized in an email.
That stance kicked off a fierce legal battle, as well as one that played out in the rough and tumble world of Wall Street trading. In September, managers at the bank instructed sales and trading staff to essentially freeze out the funds from services they rely on to make investment decisions and bundle new bonds, Insider previously reported.
Employees were told to stop sending pricing information on bonds — known on Wall Street as “runs” — and remove those clients from any distribution lists they may have been on. In some cases, salespeople and traders ignored Bloomberg chat messages or refused to return calls from those clients. Desk research, pricing data, and other market-based color can often translate into the edge funds need in the hand-to-hand combat of distressed debt trading.
And yet the asset managers had reason to believe their clients were repaid the outstanding balance in full, albeit unexpectedly. After all, they’d been wired the exact amount they were owed.
They also couldn’t fathom that Citibank — a veritable Wall Street institution — could have made such a huge gaffe.
It was on these grounds that, several months later during a December bench trial conducted over Zoom, lawyers defending the asset managers argued that they were not obligated to return the money.
“Faced with these circumstances, [the lenders] believed, and were justified in believing, that the payments were intentional,” wrote Judge Furman in his conclusion. “Indeed, to believe otherwise — to believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational.”
Citigroup plans to appeal the court’s decision, per a statement from its spokeswoman.
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