A small London hedge fund firm and a lapse in bank risk controls caused a panic inside Citigroup in July, after its executives discovered a series of trades they estimated could cost the bank as much as $400 million, people familiar with internal discussions at the time said.

The concerns made a brief appearance in the bank's second quarter earnings released July 16 in which Citigroup said it had reserved $175 million stemming from "valuation adjustments related to certain financing transactions," but the details otherwise have remained a mystery.