Guy Hands, the founder of Terra Firma Capital Partners Ltd., testified in his $8.3 billion fraud suit against Citigroup Inc. that his firm wouldn’t have bid on EMI Group Ltd. if he had known there were no other bidders.
Hands, 51, claims that Citigroup’s David Wormsley tricked him into overpaying for EMI, a 113-year-old music company, in a 2007 auction. Hands testified today on the second day of a trial in U.S. District Court in Manhattan.
Hands claims Wormsley lied to him in a series of phone conversations over the weekend leading up to the Monday, May 21, 2007, auction for EMI, falsely telling him that Cerberus Capital Management LP planned to submit a competing bid.
“If he hadn’t made those statements, we wouldn’t have been bidding that Monday morning at all,” Hands told jurors, under questioning by his lawyer, David Boies.
Hands told jurors that several potential bidders dropped out in the days before the May 21, 9 a.m. deadline for bids, including Fortress Investment Group LLC, Warner Music Group Corp. and JPMorgan Chase & Co.’s One Equity Partners.
He said that on the final weekend before the auction, Wormsley, whom he described as his friend and business associate, told him that Cerberus remained in the auction and was bidding 2.62 pounds per share. Hands told jurors about a telephone conversation he said he had with Wormsley from the study of his home, at midnight, nine hours before the bids were due.
“He told me that Cerberus were there at 262, that the bid had to be in at 9 a.m. the next morning and he told me not to play any games with the price,” Hands testified.
If he had known the process had turned into a “busted auction,” with his firm the only bidder, Terra Firma would have withdrawn from the bidding and negotiated with the sellers directly for a lower price and for additional due diligence, Hands told jurors.
The morning after his midnight phone call with Wormsley, Hands said, he spoke to Tim Pryce, Terra Firma’s chief executive officer who was, at the time, the firm’s general counsel. Hands said he told Pryce to go forward with Terra Firma’s bid of 2.65 pounds a share.
Citigroup, which provided 3 billion pounds ($4.71 billion) in loans to finance the $6.7 billion 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.
Some observers have said the suit is an attempt by Hands to pressure Citigroup into renegotiating the EMI financing, according to Claire Enders, chief executive officer of Enders Analysis Ltd., an entertainment industry research firm based in London.
The EMI sale, which came at the height of the buyout boom in 2007, has lost money for all involved. Since Hands bought the company, artists including Queen, Paul McCartney and the Rolling Stones have quit the label. The company slipped from a profit of 86 million pounds in 2006 to losses of 1.57 billion pounds in 2009 and 512 million pounds in 2010.
Hands testified that the auction, which was originally scheduled for May 23, was moved up 48 hours to May 21. The change, which Hands said he was told came at the request of Cerberus, forced Terra Firma to rush to put the financing in place.
Hands told jurors that if Terra Firma had been allowed to do additional due diligence, it would have discovered more information about EMI’s finances, including a one-time legal settlement from Bertelsmann AG and channel-stuffing, or the over-shipping of goods booked as profit, that inflated reported earnings.
Hands said he trusted Wormsley and was reluctant to sue when the EMI deal turned sour.
“I viewed David as my adviser, my banker, the person who was advising me what to do,” Hands testified. “I viewed Citibank as advising on the financing.”
On cross-examination, Citigroup lawyer Ted Wells showed Hands e-mails and documents that suggested that Terra Firma’s 2.65 pound bid came as a result of a May 6, 2007, meeting between Hands and Eric Nicoli, who was EMI’s chief executive officer, not because of any recommendation from Wormsley.
Wells also asked Hands about his reaction to a September 2007 e-mail in which Terra Firma executive Stephen Alexander said that Cerberus had never actually submitted a bid in the auction earlier that year.
Wells, who questioned Hands about Terra Firma’s focus on investing in troubled companies, showed jurors a page from the firm’s 2007 Annual Review.
“The ability to see *potential* where others see only problems,” the review said.
Hands, who testified for about 2 1/2 hours today, will return to the stand tomorrow. Wormsley is expected to be called as a witness in the case.
The case is Terra Firma v. Citigroup, 09-cv-10459, U.S. District Court, Southern District of New York (Manhattan).