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A bad buy - with a little help from his friends?

Guy Hands claims his advisers made him pay too much for EMI, the Beatles' label – and is taking them to court

In November 2008, Guy Hands, one of Britain's biggest private equity plutocrats, invited a number of senior executives from the American finance giant Citigroup for a pheasant shoot at Villa Saletta, his 1,760-acre estate in Tuscany once owned by the bankers to the Medici family.

It is likely that among the visiting Citigroup managers was David "the Worm" Wormsley, the head of the bank's UK investment arm and a firm friend of Mr Hands after the pair had thrashed out no fewer than 20 swashbuckling deals worth more than £35bn in the previous decade, including their most high-profile purchase – the £4.2bn takeover in 2007 of the British record company EMI.

According to City legend, the two men had formed a partnership that was as close as it was lucrative, with Mr Wormsley a regular visitor to his client's manor house in Kent and the pair attending the opera in London. Born a year apart, boasting Oxbridge educations and sharing a taste for thrusting deal-making, the pair clearly had much in common.

All of which makes their forthcoming meeting in less than three weeks behind opposing ranks of expensive lawyers before a six-strong jury in New York's Southern District Court one of the most potentially explosive legal spats of recent years with Terra Firma, Mr Hands' private equity fund, claiming up to £3bn from its bankers.

A source familiar with the case said yesterday: "There is little doubt that this will go all the way to the jury. Neither side is in a mood to settle."

A flavour of the acrimony that exists between the one-time business partners is given by the legal document filed by Terra Firma which accuses Mr Wormsley of making representations that were "knowingly false and maliciously designed".

At the heart of the rancour lies what has turned out to be Terra Firma's disastrous acquisition of EMI and a core claim that Mr Wormsley, 50, enticed Mr Hands, 51, into buying the one-time jewel in the crown of Britain's music industry at an inflated price by falsely claiming another private equity bidder, Cerberus Capital Management, was still in the bidding process.

Judge Jed Rakoff, sitting in Manhattan, last week threw out two charges against Citigroup but ruled that claims of fraudulent misrepresentation and fraudulent concealment against the bank should go to trial on 18 October. The stakes are high: defeat for Terra Firma could lead to it losing control of EMI to Citigroup and a loss of confidence in it.

The Terra Firma case is understood to hinge on phone calls made in the final hours of the sale while Mr Hands was meeting business partners at the airport on Guernsey, where the private equity magnate has lived as a tax exile since last year. The Terra Firma founder claims that Mr Wormsley told him Cerberus was planning an offer of 262p per share for EMI and that he should offer 265p to finalise the deal.

The sale duly took place, earning Citigroup £6m in fees for the advice it provided to EMI and £80m for part-financing Terra Firma's bid. In an internal email, one Citigroup executive said: "We got paid on both sides."

Citigroup emphatically denies the Terra Firma allegations, stating in particular that one of three phone calls supposed to have taken place between Mr Hands and Mr Wormsley did not happen and the two others were about other matters. In his deposition, Mr Wormsley states that he "had no knowledge of the status of Cerberus's bid".

Such is the weight being placed by both sides on the phone calls that Citigroup has obtained the flight logs of Mr Hands' private jet and will use Mr Wormsley's mobile phone records to argue that the banker left voicemail messages that did not relate to any Cerberus bid. Mr Hands, meanwhile, will cite witnesses from the Guernsey meeting who will say he left the room to take a phone call and came back saying he had been told by Citigroup that Cerberus still wanted to buy EMI.

If the deal to buy the record company that brought the world The Beatles and Pink Floyd had proceeded as Mr Hands hoped, it is likely that the matter would have been a mere footnote in the annals of Terra Firma's glittering record.

But, by Mr Hands' own admission, the purchase of EMI has not been a glorious episode. The former star bond trader has written off more than half of his investment and seen the record company stagger from crisis to crisis, reputedly earning it the sobriquet "Every Mistake Imaginable".

Mr Hands was criticised for his robust managerial style, forcing through redundancies and highlighting excessive costs such as the £200,000 spent annually on "fruit and flowers" and £20,000 a month on candles. Although the label, whose roster of artists includes Katy Perry and Lily Allen, has recently seen its fortunes improve, it last month reported an annual loss of £624m.

Lawyers for Citigroup are expected to put it to Mr Hands that the proceedings in New York (chosen because the private equity baron cannot spend long periods on the British mainland because of his tax-exile status) is a manoeuvre to compel the bank to restructure EMI's debt and allow Terra Firma to retain control.

In 1997, Mr Hands and Mr Wormsley met up after a bidding war in which they were on opposing sides. They decided they could still do business together and spent a decade blazing a trail across the world of corporate finance. It seems unlikely a replay of that meeting is to take place soon.

EMI: A history

1931 Merger between UK Columbia Graphophone Company and the Gramophone Company creates Electric and Musical Industries Ltd. Alan Blumlein, an EMI electronics engineer, develops a system for recording and playing sound in stereo. In November the company opens the Abbey Road Studios. Artists signed to EMI during the 1930s and 1940s include Sir Edward Elgar and Arturo Toscanini. Company appoints its first round of A&R managers during this time, including George Martin, who would go on to be The Beatles' producer.1955 EMI acquires Capitol Records in LA, whose artists include Frank Sinatra (below), Dean Martin and Peggy Lee.

1956 EMI, which holds rights for all RCA artists outside of North and South America, releases Elvis Presley's first single in Europe, "Heartbreak Hotel", on its HMV Pop label.

1958 Signs Cliff Richard and releases his first single, "Move It".1962 Signs The Beatles (below), releases their first single, "Love Me Do".

1964 A combination of eight EMI artists holds the No 1 position in the UK charts for 41 of 52 weeks.

1972 Signs Queen.

1973 Releases Pink Floyd's Dark Side of the Moon.

1977 Signs the Sex Pistols.

1980 Signs Duran Duran.1990 Buys 50 per cent of Chrysalis Records, acquiring the remaining stake 12 months later. Over the next decade the label would also sign Blur (right), Radiohead, Robbie Williams (right) and Coldplay.

2002 EMI gives Williams a record £80m, four-album contract.

2005 Coldplay's X&Y is the year's best-selling album, shifting 9 million copies worldwide.

2007 Sir Paul McCartney leaves the label. Later in the year Guy Hands's private equity firm, Terra Firma, acquires the company for £4.2bn. Radiohead announce that they, too, are to leave EMI. Hands has plans to reduce workforce by 1,500 to 2,000, and cut costs by £200m a year.

2008 Tony Wadsworth, UK chief executive, leaves company after 25 years. Coldplay's Viva La Vida is year's best-selling album, selling 7 million copies worldwide. Joss Stone announces that she wants to leave the label, citing the breakdown in her relationship with the company after Terra Firma's takeover.

2009 The Beatles' remastered back catalogue sells 10 million copies in four months.

2010 In February the company announces pre-tax losses of £1.75bn for the year to March 2009. Hands appoints former ITV chief executive Charles Allen to run the music arm of the company. KPMG issues a 'going concern' warning on holding company's accounts. 1, the Beatles' compilation, is named the best-selling album of the decade in the US, but in August the company announces pre-tax losses of £624m for the year to the end of March 2010. Initial sales figures for the much-hyped new album from Katy Perry released earlier this month prove disappointing.