Citigroup Not Liable in EMI Case

By CHAD BRAY And DANA CIMILLUCA

Citigroup Inc. prevailed Thursday in a high-profile legal dispute with Terra Firma Capital Partners LP over its ill-fated purchase of EMI Group PLC, a verdict that could ultimately cause the buyout firm to lose control of the storied British music company.

In a suit filed last December, the private-equity firm and its founder, Guy Hands, alleged they were duped by Citigroup and its head of U.K. investment banking, David Wormsley, into believing a rival, Cerberus Capital Management Ltd., would make a competing bid for EMI in 2007. Terra Firma ended up being the only bidder, watched its investment in EMI whither, and in the lawsuit sought billions in damages.

After deliberating for roughly five hours over two days in U.S. District Court in Manhattan, the jury of five men and three women found Citigroup wasn't liable for fraud. The suit had originally included four counts before all but one were thrown out by Jed Rakoff, the judge overseeing the case.

The loss is a devastating blow for Terra Firma, as bankers say it could hamper Mr. Hands's ability to raise funds and continue doing deals. Terra Firma's audacious move to file the case raised eyebrows in London and New York, as it represented an unprecedented attack by a private-equity firm on a bank it depends on to help originate and fund its takeovers.

For Citi, the victory vindicates its decision not to settle the case by agreeing to a restructuring of EMI with Mr. Hands. The case was also a referendum on its trustworthiness as an investment bank, and a loss could have severely undermined its relationship with other banking clients. Citi lawyer Ted Wells argued during the case that Mr. Hands was just trying to blame someone else for his own mistake

"We are very pleased that the jury reached a unanimous verdict confirming what we have said from the beginning: that Citi and David Wormsley treated Terra Firma with honesty and integrity in the EMI transaction," Citigroup said in a statement. "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."

In a statement, Terra Firma said it will continue to focus on securing a financial restructuring of EMI with Citi, which the music company now owes some £3 billion ($4.9 billion).

"We are disappointed that the jury found that we did not prove that we relied on misrepresentations from Citi which caused a loss to our investors," Terra Firma said. "We believe that this was an important action to bring and that we had a responsibility to our investors to bring it."

Dennis Posillico, a retired postal worker from the Bronx and a member of the jury, said jurors didn't feel there was enough evidence.

"It was only emails and telephone calls," Mr. Posillico said. "It just wasn't enough."

The outcome represents an embarrassing misfire for Mr. Hands, once seen as one of the private-equity industry's golden players. He initiated the suit more than two years after he struck the deal for EMI, though he claims he didn't learn he was duped by Citi until last year. As recently as last November, Mr. Hands had sought an agreement with Citi that would restructure EMI and lighten its debt burden, according to court filings.

Citi says his real aim in bringing the suit was to pressure the bank to agree to a restructuring.

In the wake of the ruling, the most immediate challenge for Terra Firma will be trying to avert a default by EMI. Last March, Terra Firma's investors were forced to inject £105 million into EMI to keep the company from defaulting after its results fell short of minimum performance standards stipulated in its borrowings. That bought Terra Firma 12 months—until next March—before it will likely need to come up with more cash to keep the business afloat.

But it is unclear now whether, given the failed lawsuit, investors will be willing to again put up the cash the company needs. Should Terra Firma be unable to come up with the money needed to head off any default, Citigroup could seize EMI and sell it off either as a whole or in parts.

Terra Firma has already written down the value of its investment in EMI to practically zero, a paper loss of more than $2 billion for its investors.

The case has also served to highlight what a disaster EMI has been for Terra Firma and Mr. Hands.

The failure of the investment and the high-profile wrangling with Citi is likely to complicate any future efforts by Mr. Hands to raise additional buyout funds. Terra Firma's most recent fund, a €5.4 billion ($7.6 billion) pool raised in 2007, has roughly 30% of its assets in EMI.

Terra Firma acquired EMI, home to acts over the years including the Beatles, Radiohead and Katy Perry, for £4 billion, or about $6.3 billion. Citigroup acted as an adviser to EMI and funded the bulk of Terra Firma's offer.

The buyout, however, proved to be troubled from the start, as problems plaguing the music industry intensified and EMI sagged under the weight of the Citi loans. (Fonte: Wall Street Journal)