Terra Firma trial kicks off in New York

The Guy Hands-led firm is suing its financial advisor Citi for allegedly tricking it into buying EMI for £4 billion. Citi argues Hands is looking for a scapegoat for the struggling investment.

David Wormsley, a banker at Citi, was desperate to find someone to make an offer for music publisher EMI in May 2007 as it became apparent the auction for the company was quickly falling apart, according to opening remarks by David Boies, attorney for Terra Firma Capital Partners. 

Boies and Citi attorney Theodore Wells gave opening remarks Monday on the first day of the trial to determine if Citi tricked the firm into overpaying for EMI. Terra Firma is seeking “billions” in damages.

Wormsley and Citi were motivated to intentionally mislead Terra Firma about the auction, witholding the fact that the last bidder, Cerberus Capital Management, had dropped out, Boies said. Citi's so-called “busted auction” could mean the loss of “hundreds of millions of pounds”, Boies said.

According to Boies, Wormsley had already lied to the firm and said another bidder had requested the bid deadline be accelerated to 21 May when in fact EMI's lead investment banker Greenhill had proposed moving up the deadline. He lied again by telling Terra Firma's head Guy Hands that Cerberus was still in the auction and bidding £2.62 per share, Boies said. Terra Firma, feeling pressured because of the accelerated bid deadline, decided to bid £2.65 per share and acquired the company for £4 billion. Citi supplied £2.5 billion, and Terra Firma contributed about £1.5 billion.

Rather than dealing with the fact that he had put up billions … and his so-called great investment was going down the tubes, suddenly two years after the purchase, suddenly 'oh, it's not my fault'. This was no fraud, no lies. Guy Hands wanted that company because he thought it was a good investment. Nobody tricked him.

Theodore Wells

Today, that investment has given Terra Firma a lot of pain. EMI has struggled in the downturn, especially because of a general decline in sales in the music industry. The music publisher – home to the likes of Coldplay and REM – accounts for 30 percent of Terra Firma’s two latest funds.

The struggling state of EMI caused Guy Hands to look for a scapegoat to blame for the investment, Wells argued in court during his opening remarks.

“Rather than dealing with the fact that he had put up billions … and his so-called great investment was going down the tubes, suddenly two years after the purchase, suddenly ‘oh, it’s not my fault’,” Wells said. “This was no fraud, no lies. Guy Hands wanted that company because he thought it was a good investment. Nobody tricked him.”

Terra Firma alleges the fraud took place over four days, from 18 May to 21 May, 2007, when Terra Firma was considering entering an auction for EMI.

Investment bank Greenhill & Co. was leading the sale of EMI, but Citi was asked to get involved in the process because of its relationship with Terra Firma. Wormsley, a Citi banker who had a tight relationship with Hands, discussed the potential acquisition with Hands during the four days in question.

During that time period, EMI decided to accelerate the bid deadline to 21 May, putting more pressure on potential bidders to get in the game. Wormsley allegedly told Hands the request to push up the deadline was made by another bidder, Terra Firma claims.

Boies argued Wormsley knew, without the pressure of the bid deadline, Terra Firma would negotiate on the price of EMI for months. “Terra Firma wanted to take their time, but [Guy Hands] is being told, ‘you can’t do that, hurry up and bid and bid high’,” Boies said.

Wormsley allegedly told Hands Cerberus Capital Management was still bidding for EMI at £2.62 per share, even though he knew Cerberus had already dropped out of the auction when he made that statement to Hands, according to Terra Firma.

Further, Wormsley had motivation because potential bidders were dropping out of the auction one by one,

Terra Firma wanted to take their time, but [Guy Hands] is being told, 'you can't do that, hurry up and bid and bid high'.”

David Boies

until finally on 19 May Cerberus decided to back away, leaving Citi with a so-called “busted auction” and the potential loss of “hundreds of millions of pounds”, Boies said. 

Evidence shows that Terra Firma and Hands did not act like fraud victims, Wells said in court Monday.

Hands discovered in September 2007 that Cerberus had dropped out of the auction and curiously, said nothing about any alleged fraud until December 2009, Wells argued. After the deal was complete, Hands invited Wormsley and his wife to his “villa in Italy … to the opera” and took Wormsley clay-pigeon shooting. All this with “some guy who supposedly told him a big lie,” Wells said.

Terra Firma also performed heavy due diligence on the investment, and couldn’t have been deceived on the value of the company, Wells argued. In fact, all the due diligence took place before the four days in May when Wormsley spoke with Hands, he said.

US District Judge Jed Rakoff, who is presiding over the case, said the trial could last as long as three weeks.