British private equity firm Terra Firma accused Citigroup Inc of fraud and sued the bank for billions in damages in connection with Terra Firma's purchase of music business EMI Group in 2007, court documents filed on Friday in New York showed. Terra Firma accuses Citigroup of inflating the price it paid for EMI by failing to reveal that the only other bidder, Cerberus Capital Management, had withdrawn hours before an auction for EMI closed, Terra Firma's attorney Jonathan Sherman told Reuters.
Instead, the Citi executive working on the auction told Terra Firma shortly before the bidding deadline that it had to top a purported Cerberus bid to win EMI, Sherman said. Had Terra Firma known it was the only bidder left, it would not have bought EMI, he said.
"The damages are some amount of equity, which we think reaches into the billions of dollars, reflecting equity that we wouldn't have parted with but for the fraud that Citigroup committed," Sherman, of Boies, Schiller & Flexner, said. Private equity firms have struggled to keep their porfolio companies healthy amid the financial crisis, and some private equity-owned companies have either filed for bankruptcy or are struggling to meet debt covenants.
Many buyout firms went deep into debt to acquire companies during the buyout boom of 2005-7 and are now paying the price, while banks are unwilling to take further pain on loans they made in better times.
Terra Firma bought EMI at the height of the buyout boom in May 2007 in a 4 billion-pound ($6.51 billion) deal, closing the deal with a 2.5 billion pound loan from Citi and 1.5 billion in equity. Citi served as adviser, lender and broker to EMI and sole financier to Terra Firma, which contends it also overpaid for its debt as a result of the fraud, the lawsuit said. The complaint also alleges that Citigroup undermined Terra Firma's ability to manage EMI by fuelling speculation about the music company's financial health in an analyst note in October and by refusing to restructure its loans.