Judge nixes Terra Firma’s £3.9bn damages claim

The amount of damages Terra Firma might have collected in its fraud case against Citi - up to £7 billion - was reduced last week when the judge threw out the firm's claim of “lost profits” from its EMI investment.

Judge Jed Rakoff has thrown out Terra Firma’s claim of “lost profits” damages in the firm’s lawsuit against Citi, drastically reducing the amount of money Terra Firma could ultimately be awarded in the fraud case.
 
Terra Firma entered the lawsuit with three claims for damages – lost profits, being “locked-in” to the deal and a false fair market value of the company on the expectation of a competitive auction. The total damage award the firm could have received based on all three categories was £7 billion, sources have said.
 
Two of those claims, lost profits and the “locked-in” claim, were extinguished last week, leaving only the fair market value discrepancy, which could bring the firm up to £1.75 billion, according to a source close to Terra Firma.
 
Last week, Rakoff threw out the lost profit claim. Terra Firma has argued that had it not used approximately £1.5 billion of equity to purchase troubled music publisher EMI in May of 2007, the firm could have invested the money and realised a profit of roughly £3.9 billion, based on Terra Firma’s historical rate of return. 
 
The firm was also seeking damages for more than £2 billion claiming it was “locked in” to holding EMI after the acquisition. That claim was withdrawn by Terra Firma attorney David Boies after Citi attorneys argued the firm had several chances to back out of the deal before it closed. 
 
The only claim remaining is “fair market value”, or the difference between the £1.5 billion of equity Terra Firma invested in the company and the value of EMI on 17 August, 2007, the day the transaction closed. That valuation is highly disputed by Citi and Terra Firma. With the first two claims gone, the firm could still be awarded up to £1.75bn under the fair market value argument, according to a source close to Terra Firma.

The jury will determine the ultimate amount of damages should Terra Firma win the case.
 
Terra Firma is suing Citi, claiming it overpaid for EMI after Citi banker David Wormsley misled Terra Firma chief executive officer Guy Hands to believe that Cerberus Capital Management was still bidding for EMI, when the firm had already dropped out of the bidding. Terra Firma has no physical proof that Wormsley in fact lied to Hands, meaning the case rests on Boies' ability to convince the nine-member jury that Wormsley is a liar.