Wednesday night turned out to be a costly one for Guy Hands dreams as billions of dollars in potential damages went up in smoke when the theories behind them were disallowed in the lawsuit between Terra Firma and Citigroup.

According to press reports, Terra Firma was seeking as much as $11.1 billion in damages, but the judge said he wouldn't allow Terra Firma to present its forensic accountant's testimony based on the "lost profit" theory of damages.

That theory concerns how much money Terra Firma could have made if instead of buying EMI, it instead invested that money in a different investment.

Terra Firma alleges that it was induced to pay an inflated price for EMI based on fraudulent information provided by a Citigroup executive, and filed suit in December 2009. The jury trial is now nearing the end of its second week of testimony.

According to testimony from Terra Firma's forensic accountant Marianne DeMario -- managing director at Spectrum Consulting Partners -- who was testifying without the jury present to determine if her opinions could be used during the trial, she calculated lost profits at €4.4 billion ($6.1 billion).

But on Wednesday night, U.S. Southern District of New York Judge Jed Rakoff ruled: "I will not allow her to testify about lost profits. I really think that it is speculative and I also think the methodology is really flawed.

Also eliminated was the issue of "locked in damages," which occurred when the "plaintiff withdrew its proffer of testimony by her on the issue," the judge said in an opening statement to the court. The locked-in damages were calculated at £2 billion ($3.2
billion) according to Citigroup counsel Jay Cohen who was cross-examining DeMario on Oct. 22.

When questioned by the Judge where he was going in his examination, he answered, "I'm going to establish in a minute what her testimony is about 2007, but the testimony, as I understand it, is going to be that as of the day the transaction closed, they lost £2 billion."

With those theories of damages eliminated, Terra Firma's forensic
accounting expert can still testify on her estimate for "fair market value damages", which is also known as "make whole damages."

But while the judge is allowing her to testify on fair market value, he said in court, according to Oct. 28 transcript, that "a reasonable jury could well find that the methodology proposed by the defense is preferable, but that seems to me to be a jury question."

Whether fair market value is the only damages EMI would be eligible for is unclear. One source familiar with the case says there could be the possibility of punitive damages and there might be potential damages for the equity cure injections that Terra Firma has had to make when it tripped up over covenant conditions in the Citigroup loan agreement.

And of course, in order for fair-market value damages, or any other kind of damages to come in to play at all, the jury must decide in favor of Terra Firma.

A Terra Firma spokesman declined comment.