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Appeal over $500 million wired by mistake won by Citigroup

In a victory for the Wall Street bank that might help it recover the cash, a US appeals court has overruled a decision that permitted hedge funders to keep half a billion dollars that Citigroup delivered to them in error.

In August 2020, Citi unintentionally transmitted $900 million to the creditors of the Revlon cosmetics firm. A collection of funds that controlled around $500mn of the term loan resisted giving up their portion of the money. The legislation permitted creditors to keep the money since, in part, they had no reason at the time to know the payment was erroneous, according to a federal district court judge's decision last year, which maintained their stance.

The Second Circuit US Court of Appeals in New York rejected the district judge's justification on Thursday and remanded the case for further consideration in light of its instructions.

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

According to Eric Talley, a professor at Columbia Law School who had submitted a friend-of-the-court brief disputing the district court judge's decision, 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."

Revlon had been experiencing supply chain problems when it filed for bankruptcy in June due to uncertainty around the $900 million payment. The business informed the bankruptcy court that the lawsuit surrounding Citi's payment made it impossible for it to properly identify all of its creditors, which interfered with its efforts to borrow cash.

In the bankruptcy court, Citi said that, should it not get the $500 million, it had the right to file a claim against Revlon for that sum.

The bank stated on Thursday that it still believed the transferred monies should be returned in light of the appeals court's decision.

"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 stated.

Requests for response from attorneys for the funds who retained the disputed $500 million were not immediately answered.

The wire mistake at Citi brought attention to the bank's technological infrastructure. Later in 2020, it was followed by a $400 million punishment from US bank authorities due to flaws in risk and control systems. The Federal Reserve required the firm to modernize its procedures and technology as part of a consent decree that the bank accepted.



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