(Reuters) - A U.S. appeals court has revived British financier Guy Hands’ lawsuit accusing Citigroup Inc of defrauding him into overpaying for music company EMI Group Ltd, a disastrous purchase that reflected the risk of buying debt-laden companies during the buyout bubble.
Ordering a new trial, the 2nd U.S. Circuit Court of Appeals in Manhattan threw out a November 2010 jury verdict against Hands’ private equity firm, Terra Firma Capital Partners, over its 4 billion pound purchase of EMI in 2007 - now US$6.1 billion.
The court said a new trial was needed because U.S. District Judge Jed Rakoff in Manhattan had instructed jurors improperly on English law, which both sides agreed governed the case.
Citigroup seized EMI in February 2011 and eventually sold it in pieces after Terra Firma had defaulted on some loans and was unable to support EMI’s debt load.
Hands initially sought $8 billion in damages, though Rakoff later reduced a potential award to roughly $2 billion.
EMI’s catalog of artists has included the Beatles, Pink Floyd, Queen and Tina Turner as well as newer stars like Coldplay, David Guetta and Katy Perry.
Terra Firma won EMI at a May 2007 auction and New York-based Citigroup agreed to provide much of the financing.
Hands later claimed that David Wormsley, a top Citigroup banker in Europe and one-time friend, had told him a high bid was needed to top one by private equity firm Cerberus Capital Management LP, when in fact Cerberus had decided to withdraw.
Hands said he did not learn until September 2007 that Cerberus did not bid for EMI, leaving Terra Firma as the only bidder. Citigroup has denied wrongdoing, and argued at trial that Hands sued because of buyer’s remorse.
The jury found that Citigroup was not liable to Terra Firma for fraudulent misrepresentation, and awarded nothing to Hands.
A three-judge 2nd Circuit panel, however, said Rakoff did not adhere to English law by instructing jurors that Terra Firma had to prove it relied on Wormsley’s misrepresentations and that the misrepresentations were a substantial factor in the overbid.
“Absent fundamental error, we are loath to overturn a jury verdict in a civil case,” Circuit Judge John Walker wrote for the panel. “Because the jury instructions incorrectly shifted the burden of proof from Citi to Terra Firma on the reliance element, they were prejudicial and require reversal.”
Citigroup on Friday defended its actions.
“We are confident we will again prevail at trial as Citi’s conduct in the EMI transaction was entirely proper,” spokeswoman Danielle Romero-Apsilos said. “The original verdict made clear that Terra Firma’s baseless accusations of fraud were simply an attempt to gain leverage in debt restructuring negotiations.”
A Terra Firma spokesman said: “We continue to believe that we have a strong claim, and with the jury instructions now resolved in our favor, we expect to prevail in any subsequent trial.”
David Boies, a partner at Boies, Schiller & Flexner representing Hands, said he was “looking forward to a new trial with new jury instructions.”
After seizing EMI, Citigroup sold the company’s recorded music business to Vivendi SA’s Universal Music Group for about $1.9 billion, and its music publishing business to a group including Sony Corp and the estate of singer Michael Jackson for about $2.2 billion.
Citigroup and Terra Firma agreed that English law applied to the case because that country had the most significant relationship. England was where EMI was based and publicly traded, the alleged misrepresentations were made, and the financing was arranged.
The case is Terra Firma Investments (GP) 2 Ltd et al v. Citigroup Inc et al, 2nd U.S. Circuit Court of Appeals, No. 11-126.
Reporting by Jonathan Stempel in New York; Additional reporting by Kylie MacLellan in London; Editing by Gerald E. McCormick, Jeffrey Benkoe and Andrew Hay