The following correction was printed in the Observer's For the record column, Sunday October 24 2010
In the article below we said EMI was "home to artists such as Robbie Williams, Arctic Monkeys and Lily Allen". Arctic Monkeys are signed to the independent label Domino Records, not EMI.
They ate and drank together at London's most expensive restaurants. There were shooting weekends and trips to the opera with their wives and colleagues. Guy Hands, the billionaire private equity baron, and David Wormsley, a senior banker at Citigroup who advised Hands on deals worth £34bn over 10 years, were very good friends. So close were the pair that Wormsley sometimes offered advice to Hands's Terra Firma free of charge. "They got on like a house on fire," says a former associate, "reading each other like a couple of Siamese twins".
Now Hands is taking Wormsley, affectionately known as "the Worm" in the Square Mile, to court, claiming that his once-favourite adviser tricked him into acquiring music company EMI for £4.2bn by pretending another buyer was in the frame. In short, he is alleging fraud; Citigroup says the allegations are baseless.
Tomorrow, one of the most sensational trials to hit the financial world for years kicks off in New York before Judge Jed Rakoff and a jury of six men and women. Top American lawyers have been hired by both sides in what could be an ugly face-off.
Even now, last-minute talks are going on between Citigroup and Hands in a bid to reach an out-of-court settlement to spare both sides weeks of potentially damaging publicity and embarrassing disclosures. Hands is demanding $7bn in punitive damages. The crux of his case is that he would have paid a lower price for EMI, but claims that Wormsley pretended the company was also being stalked by US rival Cerberus Capital. He contends that he might have offered a price so low that it would have been rejected by EMI's owners and he could have invested the money elsewhere, saving himself billions and a lot of grief.
Hands, a former president of Oxford University Conservative Association who was William Hague's best man, is said to see the case as a moral issue beyond pure money. A former associate says: "He is a very moral person, with a belief in God, and he was livid that the bank had [allegedly] lied."
City punters admire Hands for his mastery of finance and analytical mind, but say he can be difficult to deal with. Some claim he is reluctant to take advice and can fly into a temper if things don't go his way.
For his part, Wormsley is horrified to be in the public eye. "I don't want to be a player in this story," he said recently. And he bitterly resents the accusation that he tried to get Hands to buy EMI so that Citigroup could collect nearly £90m in fees. The bank will say that Hands had several opportunities to walk away from the deal, even after the initial agreement had been signed.
EMI, home to artists such as Robbie Williams, Arctic Monkeys and Lily Allen, has been a disastrous investment for Hands and a blemish on his reputation as a consummate dealmaker. This is the man who has bought more than 25 companies since 1996 and sold them all for a profit bar one – the Le Méridien hotel chain, which was written off following the 9/11 terrorist attacks on New York and Washington.
His decision to take one of the world's largest investment banks to court has stunned and enthralled the City and Wall Street. If Citigroup loses, could it affect the bank's standing with clients? Could business tail off? If Hands loses, will his reputation recover? Could it dampen his enthusiasm for risk-taking?
Whatever happens, the outcome will impinge on negotiations between Citigroup and Hands, who have been talking for more than a year about offloading some of the weight of EMI's humungous debts. Indeed, many assume Hands has brought this case to strengthen his negotiating hand. If he wins and is awarded all the punitive damages he has demanded, he could wipe out EMI's indebtedness in one fell swoop.
Afterwards, he could sell EMI for a profit, as the company itself is doing quite well at the operating level, despite all the problems with internet piracy and falling CD sales. The exodus of big name artists, including Radiohead and the Rolling Stones, seems to have subsided and the company can point to a string of chart-topping singles from new British talent such as Roll Deep.
But if the case goes against Hands he could lose EMI, because it is doubtful his investors will step up again with money to cure loan covenant breaches. Under the worst-case scenario for Hands, EMI, a fixture on the music scene since it was founded as the Gramophone Company in 1897, could even fall into administration, letting Citigroup seize control, giving it the chance to sell it on to a trade buyer such as Warner Music. The humiliation would be hard for Hands to bear.
Several sub-plots surround the trial. The case will expose the delicate relationship between banks and their clients, as well as flag up Citigroup's role during the auction as both adviser to EMI and provider of debt finance to Terra Firma. Hands will allege that Wormsley was keen for him to buy the company because Citi stood to gain millions in fees on both the buy and sell sides of the takeover. An email will be read out from a Citigroup executive, Matthew Smith, who allegedly said afterwards: "We got paid on both sides of the deal."
The jury will also hear how a Citigroup executive, Chad Leat, told the press in the wake of the deal that Hands had "stepped into one of the most high- profile piles of doo-doo out there".
Citigroup will allege that Hands's real interest is to recoup something from an investment that has cost him dear.
Another sub-plot revolves around the location of the hearing, with Hands insisting earlier this year that it be the US because he didn't want to jeopardise his tax status. He fled Britain a year ago to live on Guernsey to escape Britain's rising tax rates, leaving his wife and children at their house in Sevenoaks, Kent, and vowed earlier this year not to set foot on the mainland, even to visit his ageing parents, to avoid complications with the Inland Revenue.
The EMI/Hands story began in the spring of 2007, when the mood in the Square Mile was relatively upbeat. The curtain had yet to fall on the era of easy credit and deals rolled thick and fast. Hands had surfaced as a possible bidder for EMI just a few months after he had been pipped to the post in the battle for pharmacies group Alliance Boots by rival venture capitalist KKR. The rumour at London's big banks was that Hands would not let his prey slip through his fingers again.
Terra Firma acquired EMI for £4.2bn in one of the most highly leveraged deals of the day. Hands borrowed more than £2.6bn from Citigroup, but that was to be his undoing. By August the credit crunch was causing mayhem and Citigroup was unable to syndicate the loan to bond holders as debt markets seized up.
EMI's debt was left on Citigroup's balance sheet, while the music firm was forced to make crippling writedowns to reflect new economic realities. Interest payments mounted, and in 2009 EMI reported a £1.75bn loss. It was clear to everyone, including Hands, that Terra Firma had overpaid for EMI. Several bidders who had looked at EMI said it was overvalued and described the Hands deal as "a vanity purchase".
Hands has been forced to seek £105m of extra money from the private equity firm's investors to prevent EMI from breaching banking covenants. Despite progress from EMI's profitable music publishing division, the recorded music arm has struggled.
But by late 2007, another story was unfolding. Hands was hearing rumours that he had been the only real bidder in the frame for EMI and Wormsley had allegedly fibbed about Cerberus being interested. That version of events is hotly disputed by Citigroup, but Hands ordered an internal inquiry by his legal team which concluded that Terra Firma had been tricked and Citigroup had a case to answer.
Controversy has surrounded Hands's purchase of EMI from the word go. Artists have claimed that his "bean-counter" approach to music hasn't worked. Sir Paul McCartney has described EMI under Hands as boring.
Lily Allen went even further in an interview with The Word magazine: "I hate Terra Firma. They're wankers and they don't know what they are doing. They will fail."
Even Hands has criticised the excesses of private equity in the boom, and has likened bankers to "whimpering dogs".
Now the sparks are about to fly at the southern district court of New York in lower Manhattan. Two titans of British finance are about to come face to face in a trial that could have shattering consequences for the loser.
After months of wrangling, it's time for Guy Hands and David Wormsley to face the music.