By Matt Wirz, Becky Yerak and Alexander Gladstone 

Citigroup Inc. and a big hedge-fund client are locked in an uncharacteristically public feud that has embroiled top executives at both firms and laid bare a $900 million mistaken payment by the bank.

At the root of the dispute: Citi's role helping billionaire investor Ron Perelman restructure the corporate loans of cosmetics company Revlon Inc. Some investors wanted Citi to bow out of the transaction; when it didn't, they blamed the bank for facilitating a deal that hurt their investments, according to people familiar with the matter and court documents.

Chief among those investors: $28 billion money manager Brigade Capital Management LP.

Until recently, Brigade and its founder, Donald Morgan, had worked closely with Citi. Brigade had hired Citi to help it raise at least $1.5 billion of new loan funds over the past two years, according to S&P Global Market Intelligence. The bank had also advised Mr. Morgan on potential merger-and-acquisition opportunities for Brigade in previous years, people familiar with the matter said.

Now Citi and Brigade are slugging it out in court, cutting ties and arguing over the return of around $170 million the fund received when the bank accidentally paid Revlon lenders about $900 million. Citi even took the extraordinary step last month of backing out of a nearly completed deal to arrange a $400 million collateralized loan obligation for Brigade as well as another deal that was in earlier stages, according to people familiar with the matter. This cost the bank about $1 million in lost fees, the people said.

"Though our fiduciary duty to our clients has put us into conflict with Citibank relating to their role as agent on the Revlon Term Loan, Brigade has not sought to limit any other business or trading activity with Citibank as a consequence of this specific disagreement," a spokeswoman for Brigade said.

The fight is the latest example of a big Wall Street bank caught between the competing interests of its corporate and investment clients. Years ago, banks typically served one group or the other. Today's megabanks are one-stop shops that serve clients across the financing and markets spectrum, sometimes leaving them in what can appear to be conflicted positions.

For Citi, the dispute, and especially the mistaken payment, have added to a string of missteps over the past decade, raised questions from analysts about the bank's internal controls and drawn the attention of regulators.

"The management team has acknowledged in the past that it had credibility issues, so it doesn't help that," said Brian Kleinhanzl, a managing director at Keefe, Bruyette & Woods Inc.

Past examples include a fine in 2018 for failures in anti-money-laundering controls, the disclosure of large frauds in 2014 in its Mexican unit and a $590 million settlement in 2012 of a class-action suit filed in 2007 over alleged deceitful mortgage-lending practices. The bank has since invested in anti-money-laundering programs and this year appointed a new compliance chief and created a new role, chief administrative officer, to enhance safety and controls, according to a bank spokeswoman and memos from Citi chief Michael Corbat.

Meanwhile, Brigade finds itself in the kind of limelight that Mr. Morgan, a former high-yield bond analyst, has typically avoided. While Brigade was launched primarily as a hedge-fund manager in 2006 and sometimes plays an activist role at companies, the bulk of the money it now manages is in more traditional high-yield bond funds and collateralized loan obligations, or CLOs, some of the people familiar with the matter said.

Trouble between the two firms dates back at least to April. A group of hedge funds led by Brigade, HPS Investment Partners LLC and Symphony Asset Management asked Citi to resign from its role as the agent responsible for administering a loan it had arranged for Revlon and then distributed to clients, according to people familiar with the matter and court documents. HPS and Symphony both declined to comment.

The lenders' beef? They believed Citi was helping Mr. Perelman's Revlon restructure its debt in a way that would depress the value of their investments and lower their odds of being fully repaid, according to people familiar with the matter and court documents. The bank helped Revlon with a separate transaction that gave it the votes needed to push the restructuring through.

Revlon has said it would vigorously defend itself against the "meritless" lawsuit. It said after the lawsuit was filed that the lenders have resorted to baseless accusations to try to enrich themselves and hurt the company by blocking Revlon from exercising its rights to secure the financing needed to turn around the company and navigate the Covid-19 crisis.

Mr. Perelman declined to comment.

Brigade's Mr. Morgan contacted Citi chief executive Mr. Corbat and Richard Zogheb, the bank's head of global debt capital markets, in late April, people familiar with the matter said. Mr. Zogheb said the bank would step down as loan agent and Mr. Corbat confirmed Mr. Zogheb was handling the resignation, according to the people and a lawsuit filed on behalf of Brigade and other lenders.

But days passed without Citi resigning. The bank felt it couldn't do so because the credit agreement with Revlon required it to first get consent from the company and appropriate instructions from lenders, a person familiar with the bank's thinking said.

In early May, Revlon completed the debt restructuring. In its wake, the loan held by Brigade and other investors fell to a value of around 32 cents on the dollar. It had been quoted by traders at around 70 cents before the transaction was announced, according to AdvantageData Inc.

The unhappy lenders began preparing a lawsuit accusing Revlon and Citi of fraud and breach of contract. They sued through an agent chosen to replace Citi, UMB Bank NA, in federal court in New York on Aug. 12.

The day before UMB did so, the fight took a surprising turn. Citi unexpectedly paid lenders back about $900 million of the loan's outstanding value.

That was a mistake, Citi says.

The bank said in a court filing it had planned to disburse only an interest payment it received from Revlon. Instead, it paid more than 100 times as much -- out of Citi's own funds -- because of a human processing error that wasn't caught in subsequent manual checks, according to the filing.

"We...recognize that an operational error of this nature is unacceptable, " a Citi spokeswoman said. "We have put significant, additional controls in place until the new system is operational."

As soon as Citi realized its mistake, executives began trying to claw the cash back. Ish McLaughlin, the bank's top salesman in North America, sought return of the money from senior executives he knew at firms that received payments, people familiar with the matter said. Mr. Corbat also called fund managers, they said.

Some firms, such as Carlyle Group Inc., KKR & Co. Inc. and Octagon Credit Investors LLC, sent the money back, people familiar with the matter said. Brigade and others, still furious with Citi over the Revlon restructuring, refused and said the cash belonged to the clients invested in their funds, according to people familiar with the matter and court documents.

Mr. McLaughlin and other Citi executives, who last winter attended a Brigade holiday party at a restaurant overlooking Manhattan's Central Park, threatened in August to sue anyone refusing to return the money, people familiar with the matter said. Some lenders offered to give Citi the money back on the condition that the bank would forfeit the funds if it lost in court. Citi refused, people familiar with the talks said.

The bank ultimately sued Brigade and about a dozen other lenders that haven't returned the money. A trial is expected to begin in November.

Write to Matt Wirz at matthieu.wirz@wsj.com, Becky Yerak at becky.yerak@wsj.com and Alexander Gladstone at alexander.gladstone@wsj.com

 

(END) Dow Jones Newswires

September 07, 2020 12:00 ET (16:00 GMT)

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