A Jury Clears Citi: The EMI Sale Was Bad Business, Not Fraud

Commercial real estate wasn't the only loony dealmaking

in 2007: When Terra Firma bought famed music company EMI for $4.7 billion, the move was expected to kick off a bidding war that would drive the ultimate price higher, even though EMI was losing money amid falling CD sales and music piracy. Indeed, when EMI cut its earnings forecast earlier in the year, it said it had suffered an "unprecedented market decline." Oops. Terra Firma quickly discovered that it had grossly overpaid.

At first, Terra Firma tried multiple routes to make the deal work, reports Bloomberg, seeking to restructure its debt with lender Citigroup (C) and cutting costs. The cost cutting tended to be Pyrrhic, however, because it caused big-name bands like the Rolling Stones to leave. Rather than merely take its losses, however, Terra Firma sued Citigroup, the company that helped EMI sell itself, for fraud. Terra Firma claimed Citi lied about competing buyers for EMI, which caused Terra Firma to overbid. It's the "look, if we knew nobody else wanted EMI, we wouldn't have bid either" defense.

It took a jury only a few hours on Nov. 4 to decide that Citi did nothing wrong and that Terra Firma just made a bad business decision. As The New York Times explains, Terra Firma and its founder, Guy Hands, are now out of options, and they face the very real possibility that Citi, as the lender behind the deal, will "foreclose" on EMI and then resell it. As Hands noted at the trial, once he sued Citi for fraud, Citi's willingness to restructure the loans in a functional way disappeared. Because of the jury verdict, Hands will lose as much as 60% of his personal fortune, which got tied up in EMI. No wonder he wanted a way to recoup his losses.

A "Cat Fight"

While the jury exonerated Citi, it's clear that its involvement had at least shady overtones, which Terra Firma tried to play up at trial. Citi had "played both sides" of the deal, Terra Firma argued, because it got fees from both EMI and Terra Firma. Citi countered that it did nothing unethical, and also noted it has since had to substantially write down the loans it made for the deal.

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U.S. District Court Judge Jed Rakoff oversaw the case, which he considered a "cat fight between two rich companies." Before letting the case go to the jury, Rakoff reduced the stakes by lowering the damages that could be recovered and eliminating the possibility of punitive damages. (Not that a jury that finds for the defense in a matter of hours was likely to award punitive damages.)

One late-breaking intrigue involved the jury. A juror was dismissed during the trial, shortly before deliberations were to start. Citi's lawyers discovered she had been given a special thanks by Michael Moore in the credits for his movie Capitalism, A Love Story, and wanted her off for that reason. When Judge Rakoff asked the juror some questions one-on-one, however, he decided she lied to him and let her go for that reason.

Who knows what impact, if any, she might have had on the outcome had she participated. I'd imagine someone aligned with Moore wouldn't have been inherently sympathetic to either side, given the rich companies involved in this "cat fight."