Image: Citigroup ad. Source: Citigroup

By Imani Moise

(Reuters) – Citigroup Inc won a small victory on Tuesday in its battle to recoup nearly $900 million it mistakenly sent to creditors of troubled cosmetics company Revlon Inc.

A U.S. judge blocked a hedge fund from doing anything with its nearly $175 million portion of the payout while he considers a preliminary injunction that could eventually require the firm to repay Citigroup.

In a large blunder, Citigroup last week erroneously repaid a nearly $900 million loan made to Revlon, a day after lenders sued the cosmetic company over its restructuring tactics.

Citi quickly caught the payment error and was taking steps to recover the funds, the bank has said.

Citi had been acting as agent on the loan, meaning it collected payments from Revlon to distribute to the creditors, but the accidental payment came from the bank’s own funds.

The error has drawn scrutiny from regulators who have begun looking into the loan and raised questions about the bank’s operational resiliency.

The regulatory fallout of the mistake is likely to be drawn out, long time banking analyst Dick Bove from Odeon Capital Group said in a research note.

“A payment error by the nation’s only truly international bank is likely to cause significant questions concerning the

systems the bank is using,” he said.

Brigade Capital Management LP, which got $175 million from the payment, has so far refused to give the money back. Citigroup wired the money to 43 Brigade funds because they were Revlon’s lenders, rather than Brigade itself.

“To target Brigade as if they were the lender here, it just doesn’t work and it doesn’t make sense with respect to the type of relief they’re seeking,” said Robert Loigman, a lawyer representing Brigade.

An attorney for Citigroup asserted that as manager of the funds, Brigade has the power to return the money to the bank, and that if a judge rules the hedge fund can keep the funds it would create dangerous precedent.

“We think it creates serious issues for the banking industry If players like Brigade can understand, by all accounts, that this was unintentional, that this was a mistake, and can reap a windfall from it,” said Matthew Ingber, who represents Citi.

Reporting by Imani Moise; Additional reporting by Jonathan Stempel; Editing by Nick Zieminski and Tom Brown.

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Source: Reuters