Legal battle over EMI deal arrives in court

Guy Hands, of private equity firm Terra Firma, will testify in a Manhattan court today in a case to decide whether Hands was duped into overpaying for the EMI music company. Terra Firma, backed by Citi loans of $2.6 billion pounds, bought EMI in 2007, but the downturn soured the deal and the relationship between Terra Firma and Citi.

(Reuters) – Outspoken British financier Guy Hands and his onetime top Citigroup banker friend David Wormsley will take their bitter dispute over whether Hands was duped into overpaying for the legendary EMI music company to a jury trial on Monday.

Barring a last-minute settlement over a 4 billion pounds ($6.4 billion) agreement in 2007 that came to epitomize the perils of loading companies with debt and the associated risks, Hands will be called to testify in Manhattan federal court.

Hands’s Terra Firma [TERA.UL] buyout house bought EMI in 2007, backed by Citi loans of 2.6 billion pounds, but the ensuing downturn and the high debt burden quickly left EMI scrambling to keep it out of the bank’s clutches.

The case centers on phone conversations between Hands and Wormsley on a weekend in May 2007. Hands says Wormsley told him that if he did not make a strong bid for the record company, rival Cerberus Capital Management LP would win with a higher offer.

Wormsley denies telling Hands of any Cerberus bid. As it turned out, there was never a bid from Cerberus or any other competitor of Terra Firma.

A month ago, presiding U.S. District Judge Jed Rakoff allowed Terra Firma’s claims for fraudulent misrepresentation and fraudulent concealment to proceed to a jury. Rakoff granted judgment in favor of Citi on two of Terra’s claims.

Both Terra Firma and Citigroup declare they are confident of success at the trial.

“Terra Firma’s allegations are categorically untrue,” a Citi spokeswoman said in an emailed statement. “Citi and Mr. Wormsley have treated Mr. Hands and Terra Firma at all times in a forthright and honorable fashion. We look forward to our day in court and are confident that we will prevail.”

Citi is scheduled to report its earnings on Monday.

Terra Firma’s 2009 lawsuit against Citigroup accuses the bank of inflating the price of EMI by not revealing that Cerberus had pulled out of the auction. Citigroup denies the claims.

“From the beginning, we have said this case was about fraud committed by Citi and we have strong evidence to support our claims,” said a spokesman for Terra Firma in an emailed statement.

Part of Citi’s defense is that Hands maintained a personal relationship with Wormsley after the deal, and continued to employ him on other transactions, according to court papers.

A settlement to halt the trial at the eleventh hour could be possible, despite mediation talks last month between lawyers failing to result in a deal.

Lawyers for Terra Firma and Citi are likely to hold informal talks even after the trial has started, and could halt the process at any point, one private equity lawyer said.


The civil trial starts Monday in U.S. District Court with jury selection to be followed by opening statements from each side. It could last several weeks.

The judge has significant experience in white collar business tussles. One of Rakoff’s most highly publicised cases was a dispute between U.S. securities regulators and Bank of America over its January 2009 takeover of Merrill Lynch.

Terra Firma’s legal team is led by David Boies, chairman of law firm Boies, Schiller & Flexner, who represented former Vice President Al Gore in the 2000 presidential election recount.

Citi is being represented by experienced white-collar defence lawyer Theodore Wells Jr. at Paul, Weiss, Rifkind, Wharton & Garrison LLP, who defended financier Michael Milken.

Guy Hands is expected to be the first witness called.

Prospective jury members are expected to be asked about their past involvement with the private equity or investment banking industry, and any prior experience with auctions.

EMI breached the terms of debt held by Citigroup at the end of March, capping a torrid period for the business after it unveiled in February a 1.56 billion pound net loss for the previous year.

EMI’s fortunes have improved thanks to hits from artists including rapper Tinie Tempah and country group Lady Antebellum, but a tightening of the terms on Citi’s loans has forced Terra Firma back to investors for more money. (By Grant McCool and Simon Meads. Additional reporting by Megan Davies in New York; Editing by Robert MacMillan)