(Reuters) - A U.S. appeals court has revived British financier Guy Hands' lawsuit accusing Citigroup Inc of defrauding him into overpaying for music company EMI Group Ltd, a disastrous purchase that reflected the risk of buying debt-laden companies during the buyout bubble.
The 2nd U.S. Circuit Court of Appeals in Manhattan overturned a November 2010 jury verdict against Hands' private equity firm Terra Firma Capital Partners over its 4 billion pound (now US$6.1 billion) purchase of EMI in 2007.
It said Hands deserved a new trial where he can seek damages because U.S. District Judge Jed Rakoff in Manhattan incorrectly instructed jurors on English law, which both sides agreed governed the case.
Citigroup seized EMI in February 2011 after Terra Firma defaulted on some loans to the bank and was unable to support EMI's debt load.
EMI's catalog of artists has included legends like The Beatles, Pink Floyd, Queen and Tina Turner, as well as newer stars like Coldplay, David Guetta and Katy Perry.
Terra Firma had won EMI at a May 2007 auction and New York-based Citigroup agreed to provide much of the financing.
Hands later claimed that David Wormsley, a top Citigroup banker in Europe and onetime friend, had told him a high bid was needed to top a bid by private equity firm Cerberus Capital Management LP, when in fact Cerberus had decided to withdraw.
Hands said he did not learn until September 2007 that Cerberus did not bid for EMI. Citigroup has denied wrongdoing.
BURDEN OF PROOF
The jury found that Citigroup was not liable to Terra Firma for fraudulent misrepresentation or concealment.
A three-judge panel of the 2nd Circuit, however, said Rakoff incorrectly instructed jurors that Terra Firma was required to prove it had relied on misrepresentations by Wormsley, and that the misrepresentations were a substantial factor in the overbid. The panel said this was inconsistent with English law.
"Absent fundamental error, we are loath to overturn a jury verdict in a civil case," Circuit Judge John Walker wrote for the panel.
"Because the jury instructions incorrectly shifted the burden of proof from Citi to Terra Firma on the reliance element, they were prejudicial and require reversal," he added.
CITIGROUP CONFIDENT WILL PREVAIL
Citigroup on Friday defended its actions.
"We are confident we will again prevail at trial as Citi's conduct in the EMI transaction was entirely proper," spokeswoman Danielle Romero-Apsilos said. "The original verdict made clear that Terra Firma's baseless accusations of fraud were simply an attempt to gain leverage in debt restructuring negotiations."
A Terra Firma spokesman said: "We continue to believe that we have a strong claim, and with the jury instructions now resolved in our favor, we expect to prevail in any subsequent trial."
David Boies, a partner at Boies, Schiller & Flexner representing Hands, was not immediately available for comment.
After seizing EMI, Citigroup sold the company's recorded music business to Vivendi SA's Universal Music Group for about $1.9 billion, and its music publishing business to a group including Sony Corp and the estate of singer Michael Jackson for about $2.2 billion.
Citigroup and Terra Firma agreed that English law applied to the case because England had the most significant relationship.
England was where EMI had been based and publicly traded, the alleged misrepresentations had been made, and the debt financing had been arranged.
The case is Terra Firma Investments (GP) 2 Ltd et al v. Citigroup Inc et al, 2nd U.S. Circuit Court of Appeals, No. 11-126.
(Reporting by Jonathan Stempel in New York; Additional reporting by Kylie MacLellan in London; Editing by Gerald E. McCormick, Jeffrey Benkoe and Andrew Hay)