Guy Hands, whose Terra Firma Capital Partners Ltd. paid $6.7 billion for EMI Group Ltd. at the height of the buyout boom in 2007, says he was tricked into overpaying by a Citigroup Inc. banker.
Hands is going to try to prove in a trial that started today in federal court in Manhattan that Citigroup’s David Wormsley lied to him when he said that Cerberus Capital Management LP planned to submit a competing bid for EMI, the 113-year-old music publishing company whose recording stars have included Enrico Caruso, the Beatles, Miles Davis and Radiohead.
Terra Firma claims $8.3 billion in damages, saying it would have paid less for EMI had it known that Cerberus wasn’t going to bid. In the meantime Queen, Paul McCartney, and the Rolling Stones have all quit the label, while the company slipped from a profit of 86 million pounds ($137 million) in 2006 to a loss of 1.57 billion pounds in 2009 and 512 million pounds in 2010.
The suit has been interpreted as a move by Hands “directed at putting pressure on Citi to bring them to the table to renegotiate the financing of EMI,” said Claire Enders, chief executive officer of Enders Analysis Ltd., an entertainment industry research firm based in London.
Citigroup, which provided 3 billion pounds in loans to finance the acquisition, says Wormsley didn’t lie to Hands and didn’t even know that Cerberus had decided not to bid. Terra Firma based its bid on its own estimate of EMI’s value, not on any statements by Wormsley, according to Citigroup.
Day in Court
“Terra Firma’s allegations are categorically untrue,” Citigroup said in an e-mailed 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.”
Terra Firma’s key witness will be Hands, 51, who claims he had three telephone conversations with Wormsley between May 18 and May 21, 2007, as the deadline for bids on EMI approached.
According to Hands, Wormsley told him that Cerberus, which had withdrawn from the auction, planned to bid 2.62 pounds a share. Terra Firma claims its bid of 2.65 pounds a share was based on its desire to beat the non-existent Cerberus bid.
Wormsley, Terra Firma’s “trusted adviser,” was “playing two sides of the street at the same time,” David Boies, the lead lawyer for Terra Firma, told jurors in his opening statement today.”
Afterward, Citicorp covered up the fraud, by perpetuating the fiction of a Cerberus bid after the auction was over, Boies said.
“They knew that they had lied and they made Terra Firma make this bid on the fictional idea that there were other bids,” Boies said.
“There was no fraud, there were no lies,” said Citigroup lawyer Theodore Wells in his opening statement. “Guy Hands wanted to buy EMI. He wanted to win.”
Enders said the EMI transaction was “immensely overvalued” and that the company has “bumped along from one short-term financial crisis to the next” since the sale. Hands has tried unsuccessfully to persuade Citigroup to come to an agreement that would reduce EMI’s debt, she said.
New York Jurors
“From the beginning, we have said this case was about fraud committed by Citi and we have strong evidence to support our claims,” said Jonathan Doorley, a Terra Firma spokesman, in an e-mailed statement. “We look forward to the commencement of the trial on October 18, when Citi will have to answer to a group of New York jurors.”
Citigroup was trading on the New York Stock Exchange for about $53 in May 2007. The shares rose 13 cents to $4.08 as of 11:12 a.m. today.
In addition to Hands and Wormsley, likely witnesses include Simon Borrows, chairman of Greenhill & Co.; Cerberus Capital managing director Alexander Wolf; Chad Leat, chairman of Citigroup’s alternative asset group; Paul Simpkin, co-head of European loans and leveraged finance at Citigroup; and Michael Klein, former Citigroup co-head of markets.
The suit was filed in New York state court in December, more than two years after Terra Firma won the bidding for EMI. It was moved to federal court in Manhattan.
U.S. District Judge Jed S. Rakoff, who will preside over the trial, has twice denied requests by Citigroup to throw the case out entirely. In March, he rejected Citigroup’s argument that the case must be tried in the U.K. Last month, Rakoff dismissed two of Terra Firma’s legal theories, allowing the case to go to trial on claims of fraudulent misrepresentation and fraudulent concealment.
The parties told Rakoff that the trial may take as long as two weeks.
The Terra Firma legal team is led by Boeis, who represented former U.S. Vice President Al Gore in his unsuccessful litigation over the 2000 presidential election and argued against California’s gay marriage ban. His opponent, Wells, represented former vice presidential aide Lewis “Scooter” Libby on charges of obstructing a CIA leak investigation.
The two lawyers faced each other in front of Judge Rakoff in a 2009 trial in which Boies successfully defended American International Group Inc.’s former chief executive officer Maurice “Hank” Greenberg against a suit by AIG, represented by Wells.
The case is Terra Firma v. Citigroup, 09-cv-10459, U.S. District Court, Southern District of New York (Manhattan).