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Citigroup Feuds With Hedge Funds Over Botched Payment

Citigroup Inc. C 1.98% 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. REV -0.26% 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.

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https://dnyuz.com/2020/09/07/citigroup-feuds-with-hedge-funds-over-botched-payment/