U.S. judges weigh British buyout mogul Hands' appeal

Thu Oct 4, 2012 2:58pm EDT

* Terra Firma dealmaker appeals 2010 trial loss to Citibank

* Argument centers on English law both sides agreed to use

By Grant McCool

NEW YORK, Oct 4 (Reuters) - British buyout mogul Guy Hands heard a panel of U.S. judges pick away at his lawyer's arguments in an appeal of the fraud case he lost to Citibank over his takeover of music group EMI.

Hands' Terra Firma Capital Partners challenged the trial judge's instructions to the jury, which found two years ago that Citigroup was not liable for fraudulent misrepresentation in 2007 in the $6.5 billion deal. If Terra Firma were to prevail, it could get a new trial and seek damages.

A three-judge panel of the 2nd U.S. Circuit Court of Appeals did not rule immediately after the hour-long oral arguments on Thursday. A decision could be issued in several weeks or months.

Hands, 53, appeared to listen closely from the public gallery, but he declined to comment to reporters when the hearing ended.

Hands argued in his lawsuit that he was misled by David Wormsley, a Citigroup banker and his one-time friend, into overpaying for EMI at the height of the buyout bubble. The bank denied the allegations.

After the 2010 trial, Terra Firma defaulted on loans owed to the bank and Citigroup seized EMI, whose catalog of artists has included the Beatles, Queen and Coldplay. The bank agreed last November to sell EMI in pieces to Vivendi's Universal Music Group and Japan's Sony, ending 80 years of independence for the storied music group.

On Thursday, the three appeals judges posed a raft of questions over Terra Firma's central argument that U.S. District Judge Jed Rakoff incorrectly instructed the jury on English law.

At the trial, both sides had agreed that English law governed the substantive fraud claims in the case after various objections were raised and then decided by the judge.

The appeals court quizzed Hands' lawyer, David Boies, on why he was not more persistent at the time.

"What lawyer would not say, 'I have a new objection?'" Circuit Judge Gerard Lynch asked him.

Lynch said it was "a little hard to believe a lawyer would be intimidated." Boies replied that Rakoff told the lawyers he would clarify his instructions "and he never did."

When Citibank lawyer Jay Cohen took his turn at the podium, he said, "I don't believe any argument has been made that Judge Rakoff got it wrong."

Terra Firma sued in the United States because Citigroup has its headquarters in New York. At the trial, Hands testified that he based his bid price for EMI on Wormsley telling him there was a strong rival bid from Cerberus Capital Management. Wormsley denied giving bid details to Hands.

As it turned out, there was no other bid and the deal became a symbol of the risks of loading companies with debt. Terra Firma paid 4 billion pounds, or $6.5 billion for EMI, with Citigroup providing 2.6 billion pounds ($4.2 billion) debt.

Terra Firma argues that under English law, Hands was entitled to a presumption that he relied on Wormsley's alleged misrepresentation. The firm contends Rakoff refused to instruct the jury on this point.

It said the court "compounded its error" by telling jurors they could find liability only if they decided Citigroup had intended for Terra Firma to rely on false statements "to Citi's benefit and Terra Firma's detriment".

All that was required under English law, Terra Firma argues, was to find Wormsley intended Hands to rely on what he told him, irrespective of benefit or harm.

The case is Terra Firma Investments v Citigroup Inc in the 2nd U.S. Circuit Court of Appeals No. 11-0126

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