Details of the blunder were revealed as the workers took the stand on the first day of a trial in which the bank is seeking to recover more than $500 million from recipients that say they were owed it.
The trial is expected to shine a spotlight on one of the biggest and most embarrassing banking errors in recent memory — one that has already forced Citi to explain its mistake to federal regulators and tighten its internal controls. The case is being closely followed on Wall Street, especially in the syndicated loan industry. A trade group has argued that a win for the creditors could expose banks that facilitate wire transfers and serve as administrative agents to unnecessary risk.
At the heart of the breakdown was a system known inside the bank as the “six eyes” approval process. Under the six-eyes protocol, three people must be involved in reviewing and executing wire transfers that originate in the asset-based transitional finance group.
In the first step, an employee designated as a “maker” manually puts payment information into the bank’s Flexcube loan processing program. In most cases, Citigroup relies on the outside technology firm
Ltd. for this step. The second step also typically involves a Wipro employee, who serves as a “checker” on the maker’s work.
The last step features a team of Citigroup employees who serve as the “approver” and the final check on the payment. For the $900 million mistaken Revlon transfer, Vinny Fratta was the approver.
Fratta, a senior manager in Citigroup’s global loan operations group, joined the bank in 2006. After a series of promotions, he was named to manage the asset-based transitional finance group in 2012, overseeing a team of six Delaware-based Citi employees and nine Wipro employees in India who work exclusively with the bank.
In a declaration filed in court, Fratta said the bank can process hundreds of wire transactions a day using the Flexcube system. It has a default mode that will send a wire payment unless the maker in the six-eyes system overrides that option. While that box was checked for some portion of the Revlon payments, it wasn’t checked for all of them.
At first, Fratta figured the error was due to a technical failure.
But “as the day wore on,” he 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.”
Citibank, which was acting as administrative agent on the loan, says it accidentally sent $900 million of its own money to creditors of the struggling cosmetics company on Aug. 11 while trying to make a periodic interest payment — including to some creditors that had been locked in a battle with Revlon over the restructuring of its debt.
The bank sued 10 firms that manage assets for the Revlon creditors, including Brigade Capital Management, HPS Investment Partners and Symphony Asset Management, which have refused to return the funds their clients received. The firms say the transfers were the exact amount owed their clients under a 2016 loan to Revlon and they should be allowed to keep the money.
‘Discharge for Value’
They argue the funds are now theirs as “discharge for value” under a 1991 New York court ruling that a creditor can keep money transferred in error under certain circumstances. Citibank has said the creditors knew the payment was a mistake, ridiculed the bank for making it and ordered trustees and custodians to ignore the repayment requests.
The wire transfer was sent to 315 Revlon lenders, Farrell testified on Wednesday. At the time of the transfer, he said, Citi gave notice of an interest payment made on the Revlon term loan. He referred to the incident as a processing error rather than a “fat-finger mistake,” the term for a banking or trading bungle made by pressing the wrong key.
Farrell said in a declaration filed with the court that the bank — which by now has recouped about $390 million of the accidental $900 million transfer — “encountered resistance” right off the bat from some of the defendants when it tried to get the funds back.
A representative of Brigade, when told it was an “urgent matter” and asked if the firm would return the money, told Farrell “the matter was still being considered” and he would have to get back to him, Farrell said in the declaration. An employee of HPS said he would check with others and report back but never did, Farrell said.
And, “out of the blue,” Symphony sent an email asking the bank to stop “harassing” it, he testified.
“This was puzzling, because we had never had the chance to speak to anyone at Symphony and had not received a response to any of our emails,” Farrell said.
Under questioning by a lawyer for the defendants on Wednesday, Farrell called the blunder “a processing error that occurred where the required steps to pay interest only on this transaction were not executed.”
Asked on cross-examination if he could recall an instance, in his two-decade career, in which a payment to Citibank for the entire amount of principal on a loan was sent in error, Farrell said he couldn’t. If it happened, he said, he would wonder what was going on, make inquiries and expect an additional notice explaining such a payment.
And he said he would “return the funds if that’s what I was told to do.”
Fratta, the “approver” of the transfer, said in a declaration that he was “shocked” to discover the error.
“My first reaction was reflected in a 9:51 a.m. chat to Mr. Raj,” he said, referring to a contractor in India who’d been the “checker” on the payments.
“‘Oh my,’” Fratta said he told Raj, asking, “Did we have proof that the wires went to the specific lender identified in his email? Did it go to all lenders? How much was the overpayment?”
Fratta said his intention had been to transfer to Revlon lenders interest payments of about $8 million and to reflect a “non-cash transfer” of nearly $900 million to an internal account maintained by Citi.
The trial is being held by videoconference, without a jury, before U.S. District Judge Jesse Furman in Manhattan, who will determine the outcome. It’s expected to last about four days and feature testimony from Citi employees involved in the transfers and representatives of the asset managers who have declined to return the payments.
The case is Citibank NA v. Brigade Capital Management, 20-cv-6539, U.S. District Court, Southern District of New York (Manhattan).