Citibank has the so-called six eyes rule for certain operations. It takes three people: one prepares it, another checks it, and another approves it. Not even that rule prevented a human error by which the bank wrongly paid 894 million dollars to creditors of the Revlon firm. Despite warning them of the error, a dozen investment funds refused to return 500 million to the bank. Citibank sued them and lost in the first instance. Now, an appeal court has agreed with him.
“The defendants were aware of the error and the creditors were not entitled to reimbursement at the time,” he says. the 131-page ruling, including a dissenting opinion, which was published this Thursday. Meanwhile, Revlon has filed for bankruptcy to renegotiate his debt. The suspension of payments could already be seen coming and in the summer of 2020, the company’s debt was paid at 20% or 30% of its nominal value.
With the help of Citibank, Revlon refinanced a portion of the $1.8 billion seven-year loan for which the bank was acting as agent. It was when executing that operation that the accidental payment of all the pending debt took place. Some high-risk investment, debt and alternative investment funds saw the option of recovering the debt in full and refused to return the money.
a human error
“It looks like the money has gone out.” Arokia Raj, an employee of Wipro, a subcontractor of Citibank in India, did not give credit on the morning of August 12, 2020. The accounts did not add up. No less than 894 million dollars were missing. He immediately thought of the operation he had done the previous afternoon with the debt of the Revlon cosmetics firm.
Arokia Raj had prepared the operation so that 7.8 million in interest were paid and the 894 million in principal were exchanged because part of the debt was written off from the original credit and passed to a new loan, an operation without cash movement. To make such an operation, Citibank uses an internal account, where that principal goes while the positions are adjusted.
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By default, however, Wipro and Citibank programs are made to transfer money. When processing the operation on the computer, three fields must be changed so that the funds go to the internal account and are not transferred abroad, the judges explain. Raj only adjusted one. Santhosh Kuppusamy Ravi, another Wipro employee, supervised and verified the operation without realizing the mistake.
They asked Vincent Fratta, a Citibank executive in Delaware, for approval. Fratta, also mistakenly believing that he was being processed correctly, responded to Raj via email: “Looks okay, please proceed. The principal goes to the internal account.” When Raj went to execute the operation, he got a warning: “Warning, you are sending funds out of the bank. Do you wish to continue?”. Raj thought the computer was referring to interest and didn’t care. He went home so calm that August 11, 2020.
The next morning was hectic. When Raj found out the money was missing, he told Fratta. He spoke to his boss: “Bad news”, he told her, according to the sentence. At first they thought there had been a computer error. After a few hours they were aware of the human error. At 2:25 p.m., Citigroup began sending requests to return the erroneously transferred funds. At 18.00 he returned to claim them. The next day he ordered them again.
Since much of the money did not arrive, he sent another notice a few days later: “Funds from Citibank were sent to you by mistake. To be clear, those funds belong solely to Citibank; they are not funds from the borrower or from the Revlon 2016 Loan facility. In light of this erroneous transfer, you are legally obligated to repay those funds and, as is standard industry practice when erroneous fund transfers occur, we expect you to repay those funds to Citibank immediately,” it warned.
A trial by Zoom
In the end, some 200 Revlon debt holders who had received the erroneous transfer paid back the money: some $385 million. However, 10 firms representing 126 other creditors refused to refund the remaining $500 million. Citibank did not take a week to go to court.
The first trial was held by Zoom in December 2020 due to the covid pandemic. The judge concluded that this was the money that Revlon owed to the creditors, that they had done nothing wrong, that they could not even imagine that Citi would make such a mistake and that the debt had simply been paid off. They didn’t have to pay the money back.
Citibank appealed and now the judges agree: “The defendants are not protected from Citibank’s claims for restitution (…) since they were on notice that the unexpected and surprising apparent reimbursement of the entire principal amount of their loans was attributable to an error”, says the sentence.
The judges underline the obvious “red flags” that made them think that the payments were an error. One of them is the absence of the notification of early reimbursement, which would have been mandatory. More importantly, “a hypothetical prudent investor, suddenly receiving an unannounced prepayment of loan principal, would have been amazed, in light of Revlon’s apparent deep insolvency, that he could find the resources to make a nearly $1 billion payment. dollars,” they say. They also highlight the fact that the debt was trading at 20-30 cents on the dollar. The judges conclude that “a reasonable investigation [por parte de quienes recibieron el dinero] would have revealed the mistake.”
With all this, they cancel the district judge’s sentence and they refer the case to him so that he sentences according to his criteria. The money, meanwhile, is still frozen pending a final judgment.
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