Guy Hands, the head of private equity firm Terra Firma, is to return to the court room to resume his long-running legal battle against Citigroup over the way that it seized control of EMI.
Citigroup brought an end to Hands’ ill-fated reign of the British major in February 2011 after Terra Firma failed an insolvency test. The holding company had originally acquired EMI in 2007 via a £4.2 billion ($6.3 billion at 2007 rates) buyout financed by £2.5 billion of debt from U.S. bank Citibank. When Terra Firma could no longer support those loans, EMI’s board of directors appointed PricewaterhouseCoopers (PwC) as administrators.
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The relationship between Terra Firma and Citibank had turned toxic long before then, however. In 2010, Hands sued the U.S. bank for allegedly misleading him into paying an inflated price for EMI. That case was rejected by a New York jury, before being overturned on appeal three years later over a misinterpretation of English law.
This week, Hands will once again take to the courtroom — this time in London and in front of a single judge — to reassert his claim that he was subject to fraudulent misrepresentations and sue for damages. At the heart of the defendant’s case is the allegation that representatives of Citibank falsely claimed there was a competing bid from New York investment firm Cerberus and a direct result of this advice, Terra Firma increased the level of its equity investment in EMI by £205 million.
“But for the misrepresentations, Terra Firma would not have submitted the offer letter on 21 May 2007 and taken the steps leading to the making of the aforesaid investments,” reads a pre-trail pleading from Terra Firma.
Unlike the U.S. court case of six years ago, which focused on David Wormsley – then Citibank’s European Head of Investment Banking – this latest action extends Hands’ lawsuit to multiple Citibank executives, including Michael Klein, Citi’s former head of global banking and markets, and Chad Leat, then head of global credits market. Wormsley is also, once again, among the defendants.
In addition to Hands’ central complaint that he was tricked into overpaying for EMI, he is also alleging that Citibank executives gave him false assurances about the health of the historic British music company. In particular, that from March 2007 onwards, EMI’s bank debt of £700 million had been internally categorised by Citibank as “7+”, which the bank equates to junk bond status with over 16 percent probability of default.
Terra Firma’s pre-trail submissions also include disclosures from senior Citibank staff at the time of the August 2007 sale, including an email conversation between bankers Jan Skarbek and Matthew Smith specifically about the EMI deal.
“Well done! I am amazed you got them to pay up for that old pup,” wrote Skarbek in May of that year. Smith responded by saying: “Thanks. Can’t imagine why Guy bought it — he must have a Machiavellian plan.”
Terra Firma cites correspondence from another Citibank employee – Mark Simonian – who sent an email to Smith in July 2007 stating: “At long last you sold the pig” as further evidence of misrepresentation.
In addition to losing its entire £1.6 billion investment in EMI, Terra Firma is claiming for damages representing the profits it would have made on other investments had it not purchased the already ailing music company. The Guernsey registered company estimates these to be between €650 and €800 million.
“This is a new trial, with new evidence and new allegations of fraud against Citi regarding the sale of EMI. We look forward to an English court considering these serious claims under English law. We will not comment further at this time,” said a spokesperson for Terra Firma.
Citibank denies Hands’ claims and says that the email correspondence cited by Terra Firma was between employees who were not involved in the financing talks. The trial starts tomorrow (Tuesday 7) in London and is expected to last for six weeks.
Updated June 6, 2:46 p.m. ET: This article was updated with new information from Terra Firma on the forthcoming hearing.