It was one of the worst Wall Street mishaps in years: Citigroup accidentally wired $900 million last year to a group of lenders locked in a bitter dispute with the beauty company Revlon.
On Tuesday, a federal judge ruled that the recipients don’t have to have to return the cash.
Citi had intended to make a small interest payment on Revlon’s behalf but instead repaid the loan in full. And some of the lenders — who had sued Revlon and Citi seeking repayment of the loan — refused to return about $500 million.
Recipients of cash wired in error are typically required to return it. But in this case, the creditors had reasonable grounds to believe the payment was intentional, Judge Jesse M. Furman of the U.S. District Court in Manhattan wrote in his ruling.
“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,” he wrote.
Citibank said it strongly disagreed with the decision and intended to appeal.
“We believe we are entitled to the funds and will continue to pursue a complete recovery of them,” said Danielle Romero-Apsilos, a Citi spokeswoman.
Robert Loigman, a lawyer representing the creditors, said his clients were “extremely pleased with Judge Furman’s thoughtful and detailed decision.”
Judge Furman, acknowledging that an appeal was likely, kept in place a temporary restraining order preventing 10 investment firms from using the money.
The ruling described how Citi’s “six eyes” security safeguard, which requires three people to approve a transaction before it is executed, broke down after a contractor checked the wrong box on a digital payment form. ADVERTISEMENT
Some recipients viewed the payment as a happy surprise. A portfolio manager at Allstate, one of Revlon’s creditors, wrote in an internal message, “Not sure if this is in error, seems very unlikely.”
Citi discovered the error within a day and sent out notices to reclaim the cash — which had mostly come from its own funds, not Revlon’s — but some recipients, including Allstate, balked.
Judge Furman said his ruling might have been different if he had been able to “write on a blank slate” but that precedent compelled him to find in the creditors’ favor.
“Although the mistake that gave rise to this case may be the proverbial Black Swan event, and the risk of a reoccurrence may therefore be small, the banking industry could — and would be wise to — eliminate the risk,” he wrote.
The court ruled the lenders were justified in believing the payment was intentional. Citibank itself did not realize the magnitude of its mistake until nearly a day later.
“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,” the court document said.
The judge’s ruling used internal chats between HPS employees as further proof the creditors had no idea the wiring was a mistake until after Citibank sent notices. In the chat, which was dated a day after the mistaken wiring, HPS employees joked about the error:
DFREY5: I feel really bad for the person that fat fingered a $900mm erroneous payment. Not a great career move . . . .
JRABINOWIT12: certainly looks like they’ll be looking for new people for their Ops group
DFREY5: How was work today honey? It was ok, except I accidentally sent $900mm out to people who weren’t supposed to have it
DFREY5: Downside of work from home. maybe the dog hit the keyboard
The lenders cannot take the money and run. Since an appeal is a possibility, a temporary restraining order is still in effect.