- Citigroup has taken steps to freeze out a group of hedge funds and investment managers from its sales and trading business after the funds refused to return money the bank mistakenly sent to a group of creditors to beleaguered cosmetics company Revlon.
- Managers at Citi's sales and trading unit have instructed staff to remove the funds from distribution lists, stop sending them pricing runs, and in some cases, ignore their Bloomberg chat or phone messages, according to people with knowledge of the matter.
- In other cases, Citigroup has threatened to cut off some of the managers from access to new loans that they need to bundle into collateralized loan obligations, one of the people said.
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Citigroup is playing hard ball.
The bank is locked in a battle with a dozen hedge funds and investment firms who have refused to return the money the bank mistakenly sent on behalf of cosmetics firm Revlon last month.
While much of that fighting is playing out in the courts, the bank is also making sure to press its advantage in the rough and tumble world of trading.
Managers at the bank have instructed sales and trading staff to essentially freeze out the funds from services they rely on to make investment decisions and bundle new bonds, according to three people with knowledge of the policies.
Employees have been told to stop sending pricing information on bonds — known on Wall Street as 'runs' — and remove those clients from any distribution lists they may have been on, according to one of the people. In some cases, salespeople and traders are ignoring Bloomberg chat messages or refusing to return calls from those clients, the person said, describing it as a directive.
Desk research, pricing data, and other market-based color can often translate into the edge funds need in the hand-to-hand combat of distressed debt trading.
In other cases, the bank has threatened to withhold access to new loans that some of the funds need to bundle into new collateralized loan obligations, starving them of the supply they need to sell new debt and collect lucrative fees, according to a second person.
One person familiar with the bank's response said it was less a matter of pressing its advantage, and more about a realization that it didn't share the same attitudes with the funds about what is right and wrong, making it difficult to do business with them going forward.
The bank's credit trading business, which includes the distressed debt trading desk and securitized product groups that many of those funds trade with, is run by Mickey Bhatia and Joe Geraci.
Read more: The real reasons behind Citigroup CEO Mike Corbat's retirement
Brigade Capital Management, HPS Investment Partners, and Symphony Asset Management LLC are among the largest and well known funds fighting with Citigroup, according to court documents which identify the three as among those who haven't returned the money.
Citigroup says Brigade has $176 million in money that the bank sent to various funds and entities related to the fund. Citigroup declined to comment on the sales and trading directives, and fund representatives declined to comment.
Brigade has said that it isn't a lender to Revlon and doesn't have the money. A spokesperson for the fund told The Wall Street Journal earlier this month that the fund "has not sought to limit any other business or trading activity with Citibank as a consequence of this specific disagreement."
Citi's issues stem from an erroneous $900 million wire
Citigroup's tactics are the latest salvo in a skirmish that broke out after human error led the bank on Aug. 11 to mistakenly send $893 million in principal payments to a group of creditors to Revlon, the beleaguered cosmetics company.
Citigroup acts as the administrative agent for a 2016 Revlon loan. Instead of sending only the interest due, it sent the principal as well, according to the bank's version of events submitted in court. The funds had asked Citigroup to resign its duty, alleging that the bank was helping Revlon with a controversial debt restructuring.
Revlon's creditors sued the cosmetics company, fighting the proposed restructuring because they said the company had wrongly moved assets that should have been the collateral for their loans.
See more: Read the memo Citi CEO Mike Corbat sent staff quoting race car driver Mario Andretti to get employees to take risk and controls more seriously
When the bank went to get its money back, counterparties returned only about half of it.
The rest has been kept by some investment firms, including Brigade, HPS, Symphony and at least nine others, according to court documents. They argue that the money is rightfully theirs. Citigroup went to court and got the funds frozen, locking the two sides in a wide-ranging legal battle.
"While many lenders have recognized the payment was in error and returned several hundred million dollars so far, other lenders have either refused to return or have not committed to return the funds," a Citigroup spokeswoman said in a statement. "Those funds have been frozen by court order. We believe the law is on our side and that we will recover the outstanding funds."
Internally, the bank has explained the error as the work of a junior employee, according to one of the people. It also did so in a legal document it filed in support of its case against the funds in U.S. District Court for the Southern District of New York.
"The individual who processed the payment mistakenly did not manually select the correct system options and, unfortunately, the manual checks of that selection also failed to detect the mistake," according to the bank's filing.
Citigroup's sales and trading tactics aren't the first time it's sought to wield its influence. In the days following the Aug. 11 transfer, the bank removed itself as the manager of a $400 million collateralized loan obligation managed by Brigade one day before it was set to price, Bloomberg News reported at the time. The decision left the hedge fund scrambling to find another bank to take Citigroup's place, according to the newswire.
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