by Pablo Dominguez

An investment bank employee creeping into his office to steal confidential loan documents sounds like a plotline from a Hollywood movie. But this scene was part of a larger-than-life story that began unfolding at Citigroup’s Mexican subsidiary in February 2014.

The anecdotal incident at Citi’s Banamex unit – rebranded Citibanamex in October 2016 – is one of many tales of wrongdoing at the center of a tangled web of fraud accusations still being traded between the international banking behemoth, a powerful group of angry creditors to a defunct oil services company, and a former CEO now out on bail.

While the initial 2014 scandal related to controversial loans to the servicer grabbed headlines for weeks, the aftermath has all but disappeared from mainstream view. Now with billions of dollars at stake, international stakeholders are eyeing dueling lawsuits in the US District Court for the Southern District of Florida and the US District Court for the Southern District of New York, to find out whether judges in the US or Mexico will be allowed to decide their fate.

Their complex tussle centers on a basic question: How was a USD 400m fraud perpetuated at the crown jewel of Citi’s Mexican operations? A definitive answer isn’t likely anytime soon, as teams of lawyers backed by well-funded clients prepare for years of litigation. But first, a series of judges must answer a more fundamental question: Can the disputes be heard in US courts?

Citi’s lawyers have employed a containment strategy as a first line of defense, arguing that any litigation should remain in Mexico, where all of the alleged bad acts took place.

But in a series of interviews with Debtwire Investigations, a lawyer close to the situation and three former Banamex employees who each held roles related to the sham financing, described a series of deficiencies in internal lending procedures at Banamex– ranging from a lack of supervision to negligence – that left the lending program susceptible to abuse. The bank’s transactions required explicit approval from different departments at Citi in the US, said those sources.

For example, Citi’s internal credit manual, required a quality assessment by an industry expert at the bank, someone typically based in New York, the first former employee said.

Citi declined to comment on any of the allegations or respond to specific Debtwire questions about the matter.

I.O.U and sometimes why

Banamex was transformed more than three years ago by the revelation that USD 400m had been misappropriated in a scheme involving shady lending practices to Oceanografia S.A. de C.V., a well-known oil services company in the region.

At issue was a factoring program that allowed Banamex to advance cash to Oceanografia based on verified invoices for the company’s contracted work with state-owned Petróleos Mexicanos (Pemex). The bank would then collect a fee; Oceanografia would have funds to help fulfill its service obligations to Pemex; and Pemex would pay back Banamex for the invoiced work.

In their lawsuit, the Oceanografia investors claim the program was tainted when Banamex and the borrower teamed up on a plan to make the oil services provider appear more attractive to external investors than its credit profile warranted.

“Oceanografia set out to boost its appeal as an investment by inflating its books with hundreds of millions of dollars in cash advances from Citigroup,” the investors allege in court documents. “Citigroup, for its part, collected tens of millions of dollars in interest every year by extending cash advances to Oceanografia without shouldering any risk.”

Oceanografia and majority owner and former CEO Amado Yanez, however, place the blame squarely on Banamex and Citi. They argue that Banamex accepted proof of work estimates, or descriptions of Pemex work that still needed to be approved by the oil producer, instead of verified invoices. This change in protocol, they say, allowed the bank to artificially keep Pemex as a counterparty, so that it could pretend it bore a lower risk.

“The false description allowed Citibanamex (and Citigroup) to book loans to BB- rated Oceanografia as receivables from then AAA rated Pemex and to utilize funds guaranteed by Pemex that would have been unavailable to fund a loan directly to Oceanografía,” the Oceanografia/Yanez complaint reads.

Pemex didn’t return a request for comment.

Symbiosis gone sour

Creditors

Long before fraud claims were flying, Citi, Banamex, Oceanografia and Pemex operated for years in a lucrative symbiotic financing relationship.

As oil prices soared high and capital flowed freely a decade ago, Oceanografia tapped the international bond markets in 2008 with the sale of USD 335m in 11.25% bonds due 2015, and again in 2013 with USD 160m of 12% notes due 2018. The company was generating USD 257m in annual revenue at the time, almost entirely derived from Pemex, who awarded Oceanografia with USD 2.57bn worth of contracts between 2003 and 2012, according to a Mexican Senate report.

Following a Pemex internal review that found irregularities in certain contracts, on 11 February 2014 Oceanografia was barred from entering new contracts with government bodies for a period of one year, nine months and 12 days, according to the Senate report. Shortly after, on 28 February, Banamex raised fraud assertions and the Mexican attorney general’s office seized the oil services provider.

Only hours before the situation came to the light, Banamex employee Erik Cervantes was spotted by security cameras between 3am and 4am on the morning of 27 February 2014 at his local bank branch removing Oceanografia loan documents, according to court papers filed in the New York court case.

Cervantes was a cash-advance product manager in Ciudad del Carmen, an oil industry hub on Mexico’s Gulf Coast. He was responsible for reviewing and certifying Oceanografia’s requests for financing and the required documentation needed to prove that the underlying work with Pemex had been done.

“He was our eyes there,” said a second former Banamex employee. Cervantes’s location in Ciudad del Carmen made him integral to the operation because he was the only one with access to the physical documents provided by Oceanografia, the same source said, adding that only electronic copies were available to those at Banamex’s central headquarters, in Mexico City.

“[Cervantes’s position] was a weak link,” the first ex-Banamex employee said. “It was a very important role, and he was very junior.”

Cervantes was never charged with a crime, despite spending several days in jail, and his current whereabouts are unknown, according to local press reports.

“I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls, or violating our Code of Conduct,” Citi CEO Michael Corbat said in a 28 February 2014 SEC filing. “All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions.”

Dominos fall

The alleged fraud ultimately forced Banamex parent Citi to reinstate its 2013 earnings to account for a USD 235m after-tax loss.

A shakeup at the Mexican subsidiary eventually resulted in the resignation of top officials, including Manuel Medina-Mora, Citi’s global head of its consumer banking unit and chairman of the bank in Mexico. All told, the domino effect of the claims led to the firing of 11 employees, according to a May 2014 Citi internal memo, which added that the internal investigation was ongoing at the time and further disciplinary actions may follow.
The final number of dismissals in Mexico could have reached 20, according to the second ex-employee. For a time Banamex virtually halted the troubled factoring financing programs at the center of the controversy, the first ex-employee said.

A Banamex spokesperson, however, specified that the unit didn’t cancel lending activity to the oil & gas sector as a result of the Oceanografia scandal, but it did strengthen its internal controls afterwards. Those increased controls, paired with ample competition, have led the bank to lose some of its market share in Mexico, the spokesperson continued.

“There was a retrenchment of the factoring product, but there was also a company-wide reduction in the credit origination,” said Arturo Sanchez, the Standard & Poor’s analyst covering Banamex at the time. “There was a fear to originate loans, especially commercial loans to companies.”

Following the scandal, Citi also moved into a much larger role in Banamex operations, Sanchez said.
“There was a comprehensive change in the bank’s culture,” the analyst said, adding that despite Banamex’s previous lax supervision, its reputation wasn’t compromised. The bank, therefore, didn’t suffer any significant reduction in its client base or wholesale deposits, Sanchez concluded.

Nevertheless, the fallout for Oceanografia and investors caught in the crossfire has been far reaching. The Mexican government seized control of the company’s assets and threw its CEO in in jail, alleging that he oversaw a conspiracy to forge documents for invoices from state-owned Pemex in order to procure financing.

“I think that the behavior of many officials at the bank was to a large extent due to corporate bullying exercised by [Oceanografia official] Martin Diaz against the directors of the departments involved, both in Mexico and in the US,” the third ex-employee said.

Diaz was in charge of the relations between Oceanografia and Banamex, according to Fernando Martinez de Velasco, a lawyer for Oceanografia and Yanez. Martinez de Velasco declined to comment further on the situation.

Blame game

Winners of the blame game will now likely be named in a courtroom. Oceanografia and Yanez, and a group of Oceanografia bondholders, lenders and vessel providers all have initiated respective legal cases against in the Citi in the US. Yanez, who has been out on bail since April, and Oceanografia are suing Citi over claims that the bank concealed the Banamex fraud and falsely accused them.

Meanwhile creditors are essentially seeking anything they can get their hands on. The liquidation of Oceanografia is not expected to result in any significant recovery, thanks to an obsolete vessel fleet that hasn’t received proper maintenance since February 2014.

The Florida case is being pursued by Oceanografia’s bondholders – a group that includes affiliates of EIG, Ashmore and Latin American-focused bondholders – as well as vessel providers and lenders such as Rabobank.

The plaintiffs claim that Citi committed fraud and violated the Racketeer Influenced and Corrupt Organizations Act (RICO) by partnering with the company to deceive them into believing that Oceanografia was financially sound when it wasn’t, so that they would continue lending money, buying bonds and providing services.

At stake are roughly USD 1.1bn in claims stemming from the plaintiffs’s estimate of aggregated losses, including what is owed on the company’s defaulted USD-denominated bonds and loans, and what is owed to vessel suppliers for unpaid purchases and charter fees.
While the complaint doesn’t request a specific damage amount, Oceanografia noted its enterprise value plummeted from USD 2.6bn-USD 3.5bn before the fraud scheme emerged to less than USD 100m now. The complaint also noted that Yanez spent more than two years in prison and lost USD 2.6bn of his investment in Oceanografia, and nearly an additional USD 1bn in other investments.

“Rather than take responsibility for Citibanamex’s misconduct, however, Citigroup chose to portray itself as victim and whistleblower,” the joint Oceanografia-Yanez complaint reads. “That plan, however, required a scapegoat—Oceanografía.”

Your place or mine?

The group of Oceanografia’s investors, the company and its former leader are fighting fiercely to prove that the US has jurisdiction over the case. Bondholders who were badly burned by the company’s collapse into bankruptcy are unlikely to receive any recovery under a liquidation process currently underway in Mexico, meaning their only hope of collecting any cash lies in the deep pockets of Citi’s US business.

“Citigroup… partnered with Oceanografía to extract over a billion dollars from plaintiffs through a fraudulent scheme —a scheme that was planned and executed from within the United States and is right now the subject of investigations by US regulators, including the US Securities and Exchange Commission and the US Department of Justice,” lawyers for the investor group wrote in an August 2016 complaint.

“Plaintiffs try to avoid dismissal on forum non conveniens grounds by persistently referring to Banamex as ‘Citigroup,’ but wordplay cannot alter the reality that the conduct that is ‘central’ to plaintiffs’ claims undisputedly took place in Mexico,” Citi argued in court papers filed last October.

No decision on jurisdiction has been made in either pending case, although that could soon change.

New York Judge Richard J. Sullivan discussed the matter at a status conference on 24 August. Oceanografia and Yanez now have until 22 September to amend their joint complaint, while Citi’s deadline to file its expected motion to dismiss has been set for 23 October.