Citigroup defeats fraud claim over EMI deal

A federal court jury took just 4-1/2 hours to unanimously decide that David Wormsley, one of Citigroup’s top European bankers, did not lie to Hands during the May 2007 bidding for EMI, known for The Beatles and other stars.

Citigroup, EMI’s main creditor bank, provided £2.6bn, in loans for the acquisition of the music recording and music publishing company. Hands’ private equity firm, Terra Firma, paid £4bn, or $6.5bn, for EMI.

The company is now worth about $2bn less, according to Terra Firma, which has been fighting to keep the business out of the clutches of Citigroup after breaching the terms on its debt. Hands could be forced to hand EMI to the bank or he could keep working to improve the company’s health and then try to sell it.

“Terra Firma reserves its right to appeal,” the private equity firm said in a statement. “Terra Firma will continue to focus on securing a financial restructuring of EMI with its creditor, Citi.”

During the three-week trial, jurors heard testimony from Hands, 51, and Wormsley, 50, who remained friends until Terra Firma sued the bank for fraud in December 2009. The case was heard in US District Court in Manhattan.

“It was just showing emails, telephone calls. To me it wasn’t enough,” said juror Dennis Posillico, a 61-year-old retired postal worker. “I was leaning toward Hands but then I went with Citibank. The closing statement turned me.”

The emails, corporate documents, phone calls and other evidence pitted the word of Hands, who has a reputation for buying distressed companies and turning them around, against the word of Wormsley.

“The jury’s verdict makes clear that Terra Firma’s irresponsible accusations of fraud were nothing more than a misguided attempt to gain leverage in debt restructuring negotiations,” Citigroup said in a statement.

Hands said he based his bid price for EMI on Wormsley having told him there was a strong rival bid from Cerberus Capital Management that he had to beat to win the company he had coveted for 16 years. But there was no other bid.

Citigroup had business ties to all three parties, Terra Firma, EMI and Cerberus, the jury heard.

“There’s a huge element of sour grapes to his (Hands’) position,” said Marshall Sonenshine, chairman of New York-based investment bank Sonenshine Partners and an adjunct professor of finance at Columbia Business School.

“The relationship between banks and private equity firms is not one big lovefest, it’s an economic-based relationship.”

Industry insiders familiar with Warner Music Group’s thinking still expect the New York-based company to be interested in acquiring the recorded music unit of EMI if it comes up for sale when or if Citi assumes control.

There is expected to be more competition for EMI’s song publishing unit, as music publishers are preferred to recorded music units because of their steady cash flow generation.

Sony/ATV Publishing, a joint venture between Sony Corp and late pop star Michael Jackson’s estate, is expected to be interested in taking over EMI’s song publishing unit. Other likely interested parties include BMG Rights Management, a joint venture between private equity firm Kohlberg Kravis Roberts & Co and closely held German media group Bertelsmann

The case is Terra Firma et al v Citigroup et al, U.S. District Court for the Southern District of New York, No. 09-10459.