EMI Deal Ruling Against Citigroup in Terra Firma's Suit Explained by Judge

Citigroup Inc. lost its bid to toss a lawsuit accusing it of tricking Terra Firma Capital Partners Ltd. into buying EMI Group Ltd. because none of the deal documents forced Terra Firma to sue in England, a judge said.

U.S. District Judge Jed Rakoff in Manhattan in a two-page order March 24 denied Citigroup’s request to dismiss the case and said he would explain his reasoning at a later date.

In an opinion released today, the judge outlined why he rejected the bank’s argument that the dispute belongs in a U.K. court and why he allowed the case to proceed in New York.

Terra Firma accuses Citigroup of misrepresenting that another private-equity firm, Cerberus Capital Management LP, was still bidding on the music recording and publishing company, according to its complaint. Terra Firma seeks to recover “lost equity of billions of dollars” and obtain punitive damages from Citigroup, which stood to garner substantial fees as investment adviser and lender to EMI and sole financier to Terra Firma, according to the complaint.

For both private and public reasons, Rakoff also rejected Citigroup’s argument that New York, its headquarters city, is an inconvenient forum.

‘Legitimate Interest’

“As to the public factors, there is a legitimate U.S. interest in learning whether Citi, a major American bank, may be liable for fraudulent inducement, and thus subject to substantial damages,” Rakoff wrote.

Danielle Romero-Apsilos, a Citigroup spokeswoman, said in an e-mail, “We continue to believe that the plaintiff’s lawsuit is entirely without merit and we intend to seek its dismissal.”

When other private-equity firms dropped out of the EMI bidding, Citigroup misrepresented that New York-based Cerberus was actively participating in the auction and that London-based Terra Firma would lose the EMI bid unless it raised its offer, according to the complaint. Terra Firma bought EMI in 2007.

Terra Firma said it paid an inflated price for EMI, also based in London, because of Citigroup’s misrepresentation. The private-equity firm paid 4 billion pounds ($6.19 billion). It said it wouldn’t have bid for the music company had it known that Cerberus wasn’t participating.

Rakoff said one document, called the Project Mulberry Agreement, that Terra Firma signed when it first entered the bidding, required Citigroup to sue Terra Firma or EMI in England to enforce its terms. It didn’t require Terra Firma to sue there, the judge said.

Another document also didn’t require the private-equity firm to sue in England, he said.

Beatles, Coldplay

Terra Firma’s purchase of EMI, at the height of the leveraged-buyout boom, gave the firm control of the record label of the Beatles, Coldplay and Norah Jones.

Citigroup argued that documents in the deal said any dispute should be handled in U.K. courts. Terra Firma said the documents didn’t obligate it to sue there, and Rakoff agreed.

The buyout firm sued Dec. 11 in New York state court. The case was later moved to federal court in Manhattan. A trial is set for Oct. 18, according to Terra Firma’s court papers.

Guy Hands, Terra Firma’s founder and chairman, stepped down as chief executive officer last year after the firm wrote off about half its EMI investment.

Buyout firms including Terra Firma typically use loans secured on the targets they acquire to finance about two-thirds of the purchase price, and cash from their own funds for the rest. The firms usually invest no more than 20 percent of their funds in one company.

Citigroup is represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP, and Terra Firma by Boies, Schiller & Flexner LLP. Both firms are based in New York.

The case is Terra Firma v. Citigroup, 09-cv-10459, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Thom Weidlich in New York federal court at tweidlich@bloomberg.net.

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