Terra Firma may be on shaky ground as EMI case concludes

If it weren't worth billions, the trial would sound like a schoolyard spat, with childhood nicknames and allegations of lying. Stephen Foley reports
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The Independent Online

When Guy Hands – the multimillionaire private equity baron, founder of buyout shop Terra Firma, owner of historic music group EMI – made his explosive decision to sue Citigroup, he sought out one of America's highest-profile corporate litigators, David Boies, to run his case.

As the courtroom drama heads towards its denouement this week, Mr Hands may be ruing his choice.

Mr Boies failed to land a knock-out blow in his examination of David Wormsley, the Citigroup banker who is accused of lying to Mr Hands over the EMI deal, and earlier in the trial, Mr Hands's own testimony had to be interrupted for a day while Mr Boies shot across to another New York courthouse to deliver closing arguments in an entirely separate case, Lehman Brothers vs Barclays.

The 69-year-old attorney also has the California gay marriage case and a divorce battle involving control of the Los Angeles Dodgers on his docket. If the jury doesn't go Mr Hands's way, he might consider following the lead of another client, Las Vegas developer Sheldon Gordon, who is suing Mr Boies's firm, claiming the attorney was too busy and neglected his case – a claim the firm rejects.

Predicting the outcome of a jury trial is a mug's game, but consensus among those who have followed the testimony in court 14B of the federal district courthouse in lower Manhattan over the past two weeks is that the case has tilted in Citigroup's favour over the past few days. The spin has already been prepared: Mr Hands's public relations advisers will argue that pursuing the case was in the best interests of Terra Firma's investors, since the rewards from victory would have been so big.

On the one hand, Mr Boies's legal fees are expected to be "low tens of millions of dollars" while, on the other, Mr Hands has been shooting for compensation and damages of anything up to £7bn, which could more than make up for Terra Firma's colossal losses on EMI. (In a further setback, the court ruled that he could only ask for damages of about a quarter of that level.) Also, Mr Hands's advisers will say, there is no sign that his litigiousness is putting anyone off doing business with Terra Firma. For example, the firm bought an Italian solar energy company earlier this month for ¤670m (£580m), with advice from Bank of America Merrill Lynch.

The stakes are high as lawyers on both sides prepare for their closing arguments in the next few days in the expectation of a verdict by the end of the week. Terra Firma and Citigroup – via testimony from Mr Hands and Mr Wormsley – have presented dueling narratives of the tense days leading up to Terra Firma's £3.2bn bid for EMI. Each has accused the other of lying. Only one will be vindicated by the six-person jury. The other will, in effect, be branded a liar. Even in the City of London and on Wall Street, where it is money that talks, that is a label you don't want.

Terra Firma's case is that Mr Wormsley – one of the City's top dealmakers, known affectionately as The Worm – tricked Mr Hands into overpaying for EMI, jacking up the amount of Citigroup loans needed to finance the acquisition to £2.4bn. Both sides agree that EMI – home to the Beatles, Coldplay and Katy Perry – has been turned into a financial basket-case by that debt load, but have fought for the best part of two years over who should give up how much in any financial reorganisation.

Through 10 days of often comically pedantic examination of documents and emails, the questions at the nub of the case remain simple: Did Mr Wormsley know that Terra Firma was going to be the only bidder for EMI, but instead tell Mr Hands that rival Cerberus was still in the auction and that he should prepare to pay up to secure the deal? And, if he did, was it important? No and no, says Citigroup.

Mr Hands testified that his bid hinged almost entirely on a late Sunday phone call in the study of his mansion in Guernsey, where he is a tax exile. "If David hadn't made those statements, we wouldn't have been bidding on the Monday morning at all. It wouldn't have happened."

An uncomfortable Mr Wormsley testified that he didn't even remember the call. Although Mr Hands had been pestering him for days to get him to gee up Citigroup's deal finance department, he hadn't personally spent much time on the EMI sale, had forgotten most of the details of his involvement in the two-and-a-half years between the deal and the appearance of the lawsuit.

With British understatement that only appeared more exaggerated under the gaze of the American legal system, he said: "When the complaint was filed it was a bit of a shock. It was three years later." And, he added: "I have spent a large part of the last 10 months trying to remember that call. I'd love to remember it, but I don't."

The Citigroup case is that EMI had sidelined the bank and Mr Wormsley, preferring Greenhill, another investment bank, to run the auction of the company. John Gildersleeve, EMI's chairman, had specifically banned Mr Wormsley from negotiating with bidders (and internal Citigroup emails branded him a "thug" for so brutally sidelining the bank). Simon Borrows of Greenhill testified that the information about Cerberus pulling out was kept from Mr Wormsley. And Ted Wells, an attorney for Citigroup and like Mr Boies, a prominent US litigator, pointed to internal documents showing Terra Firma was ready to pay up to 265p for EMI, the price it ultimately bid.

The final piece of the defence jigsaw was an accusation that Mr Hands himself had lied during the run-up to the bid that May, by telling Greenhill that Mr Wormsley had suggested he could win the auction with a 240p bid. A "furious" Mr Wormsley, fearful that Mr Gildersleeve would think he had broken his rules, got Terra Firma's lawyers to write an email to retract Mr Hands's claim.

Mr Hands also left a voicemail message apologising to the banker for his trickery, according to Mr Wormsley – but, like so many conversations in this case, there is no way now to replay it.

So here we are, two former friends calling each other liars. The pair, who worked together on deals worth a total of more than £35bn and shared nights at the opera and clay-pigeon shooting trips, no longer even acknowledge each other, despite the close confines of the courtroom and surrounding corridors.

While the emails amount to more or less circumstantial evidence, the real issue might be who the jury decides is the more credible. Both sides have attempted to humanise their man. Mr Hands spoke movingly about overcoming dyslexia and dyspraxia. Mr Wormsley joked about his nickname, which he has had since he was five. His father had changed his given name from Worms after fleeing Germany in order to stop being teased, "but that probably wasn't the most imaginative choice". Their wives were both in court, and their lawyers each made them recount their children, four for the Handses, three for the Wormsleys – prompting an aside from Judge Jed Rakoff: "I congratulate them on their fertility, but I do think it's rather irrelevant."

With billions of pounds and the fate of one of Britain's most famous companies at stake, on such irrelevancies, much may turn.