Hands’ testimony lifts lid on ‘leaky’ auctions

Confidential information is leaked to bidders in auctions on “an everyday basis”, Terra Firma founder and chairman Guy Hands told a High Court in London on Wednesday.

Hands was being cross-examined as part of his firm Terra Firma’s law suit against Citigroup, which opened this week. The law suit alleges that Citi tricked Terra Firma into buying music company EMI in 2007 and the firm is seeking damages of around £1.6 billion ($2.3 billion; €2 billion). 

Key to Terra Firma’s case are claims that Citi bankers passed incorrect information to Hands about the existence of another bidder in the auction process, Cerberus Capital Management, and about the price Cerberus would be submitting. Citi, which was managing the auction and representing EMI, as well as provided financing to Terra Firma for the deal, denies that any such information was imparted.

The counsel for Citi, Mark Howard QC, described as a “famously brilliant cross-examiner” by legal directory Chambers & Partners, presented Hands with elements of Terra Firma’s compliance procedures as well as those stipulated by the then regulator, the Financial Services Authority.

“In assessing your conduct and evidence and how it is likely you behaved, should we work from the premise that you at all times worked to and complied with the standards of the FSA?” asked Howard.

Howard went on to analyse the non-disclosure agreement that Terra Firma had signed with EMI in order to access due diligence materials and participate in the auction; the NDA prohibited the sharing of information on other bidders’ activity.

“The whole basis on which this auction was set up,” said Howard, “was that each bidder is designed to be in the dark about the other bids?”

“It might have been designed that way,” replied Hands, “but I have never seen an auction that works in that way.”

Howard pressed on whether Hands knew at the time that the NDA prohibited the sharing of such information.

“I don’t know whether I understood it at the time, and whether I would have taken any notice. I have worked in the City for 20-odd years and things don’t work that way.”

Hands went on to describe how information on other bids was shared with participants to create “competitive tension” in the process.

“I can give you examples of numerous auctions in which confidential information is disclosed. It’s something that happens on an everyday basis in the City,” said Hands. While you don’t want information on your bid leaked to other bidders, “you assume it will happen,” he said.

“Are confidentiality agreements treated with a pinch of salt in Terra Firma?” asked Howard.

“Not with a pinch salt, but treated with realism,” replied Hands.
The judge, Justice Burton asked whether Hands would expect his information to be passed to other bidders.

“The reality is you enter these auctions,” replied Hands, “You know information is getting passed. You simply hope you have better and more reliable information.”

In a difficult morning for Hands, he faced questions about the writ issued in his name against Chuck Prince, then CEO of Citi. “You issued a claim making false statements about Mr Prince. However you look at it, however much shilly-shallying, you made allegations of fraud knowing that the allegations were false,” said Howard.

Terra Firma bought EMI in 2007 and subsequently lost £1.5 billion when Citi took control of the company in 2011. The London proceedings are Terra Firma’s second attempt to sue Citi following the transfer of the case from New York.

The trial continues.