EMI Judge’s Damages Limitation

If Terra Firma chief Guy Hands wins his lawsuit against U.S. bank Citigroup, it’s unlikely he’ll receive the billions of dollars in damages he’d have wanted.

The founder of the private equity firm that paid £4.2 billion for EMI in 2007 has wanted up to £4.36 billion ($7 billion), but Judge Jed Rakoff has questioned how that figure was reached.

The judge has thrown out a method of calculating financial injury known as “lost profits,” which Terra Firma was using to seek up to $6.1 billion.

That was the method used by Marianne DeMario, Terra Firma’s expert witness. It’s based on the amounts Hands made on previous investments and assumes he’d have made a similar return on the EMI deal.

“I really think that it is speculative and I also think the methodology is really flawed,” Judge Rakoff told the Manhattan District Court Oct. 29. “I had a lot of problem with her using the historical rate of return from a boom period that involved Terra Firma.”

Hands claims Citigroup banker David Wormsley led him to falsely believe he was up against a rival bidder for EMI, hiking up the price significantly. Citi denies the allegations and says Terra Firma brought the case only when it realised it made a bad investment.

Apart from advising EMI during the course of the auction, Citi also made millions by lending Terra Firma more than £3 billion ($4.8 billion) of the money it needed to complete the deal.

Judge Rakoff said he would allow another method of calculating damages. It’s based on an estimate of the difference between what Terra Firma paid for EMI and the value of the music company in May 2007 using discounted cash flow – a way of valuing companies used by private equity firms.

If that method is used, Citigroup’s damage liability falls to about $2 billion. That amount brings the two sides much closer together and possibly opens the door for an out-of-court settlement.

The trial, which deals with one of the most high-profile messes created by the credit boom, went into its third week Nov. 1.
Much of the testimony the court has heard must have been like watching a Punch and Judy show.