David Wormsley, long regarded as a rainmaker among U.K. investment bankers, is known to carry nothing but a classic novel into mergers and acquisitions meetings. As a rival banker told the Daily Telegraph of London several years ago, "The idea is that all the essential information is in his head."

The problem, however, is that's where information essential to the sale of EMI Group plc stayed -- in Wormsley's head. Or so Terra Firma Capital Partners Ltd., a U.K. private equity firm, is charging in a lawsuit filed against Wormsley's employer, Citigroup Inc., in December.

Wormsley's alleged sin of omission was not informing Terra Firma that its sole remaining rival for EMI had dropped out of the bidding for the London-based music company the weekend before the auction's conclusion. In light of the role that the complaint attributes to Wormsley -- "relationship manager for all issues arising between Citi and its affiliates on the one hand, and Terra Firma and its affiliates on the other" -- the withholding of such information is inconceivable.

But that wasn't Wormsley's only role in connection with the sale of EMI 2-1/2 years ago. The complaint says that the London-based banker also served "as EMI's lead investment advisor and one of the people who ran the auction." And it is in those capacities that Wormsley is also charged with a sin of commission.

In seeking not just the best price but any price for EMI, the investment adviser did more than keep quiet about the auction having been reduced to a field of one. The suit alleges Wormsley also lied to Terra Firma chairman Guy Hands by claiming Cerberus Capital Management LP remained in the contest even after the would-be private equity rival had informed EMI of its withdrawal.

News of Cerberus' exit would normally have produced a "busted auction," allowing Terra Firma to low-ball its bid or to skip, with impunity, the filing of a binding offer. But rather than risk either contingency, the complaint contends, Wormsley asserted to Hands just hours before the auction's deadline "that a failure by Terra Firm to provide a bid by Monday, May 21, 2007 at 9:00 a.m. at or above £2.62 [per share] would ensure that Terra Firma would lose the EMI auction to the other bidder."

The coaxing apparently worked. Terra Firma's general partners agreed to a last-minute bid of £2.65, securing a deal valued at £4 billion ($6.4 billion) that now ranks among the worst in the history of private equity. In fact, of the £1.5 billion of its own capital it sank into EMI, Terra Firma wrote off £1.2 billion in March 2009.

"Because of Citi's misrepresentations, Terra Firma paid a fraudulently inflated price for EMI, in the equity it invested and the debt it incurred," the complaint contends. So now it is seeking "to recover its lost equity of billions of dollars," as well as punitive damages "to deter and punish Citi's egregious wrongdoing."

Although the filing of the complaint some 29 months after the transaction closed elicited a flurry of stories, the coverage lasted about as long as a light snow. It was about as deep, too. The media either cast Terra Firma as a sore winner for overpaying to take EMI private or played up "the Worm" sobriquet by which Wormsley is known in U.K. banking circles.

The case's simplicity may ultimately justify such easy characterizations. As Jonathan Sherman, a partner with Terra Firma law firm Boies, Schiller & Flexner LLP, explains: "There are very few facts at issue here. It quickly comes down to what did Citi know and when did it know it."

Some dealmakers, nonetheless, fear that the complaint filed in New York State Supreme Court, in deference to Citi's New York headquarters, could cast an unflattering light on their persistently opaque ecosystem. Certainly, Terra Firma v. Citi could be a career ender for Wormsley. But it could also be a game changer for everyone in M&A.

Auction protocols appear in particular need of an overhaul. The complaint brings into sharp relief the conflicts of interest inherent in almost any deal of any size. And the suit does nothing if not advance the argument that the repeal of the Glass-Steagall Act, which once separated investment banking from commercial lending, deserves a rethink.

Wormsley, described in the suit as "then the head of U.K. Investment Banking for Citi and now chairman of U.K. Banking at Citi," declined to talk to The Deal. But the Cambridge University alumnus did vent over Terra Firma's charges in the Sunday Telegraph, calling them "without foundation" and "deeply upsetting."

He also told the London newspaper: "What is the banker's role if not to use your tactical abilities for the benefit of your client?" However, for today's investment banking elite, the issue of who is whose client at any one juncture and at what level of priority is no longer easy to discern.

Hands had reason to put trust in Wormsley. Their relationship began in 1997, when Wormsley, while still at Schroders plc, advised British brewer Bass plc on the sale of its vast pub estate. Hands, then head of the principal finance group at Japanese bank Nomura International plc, participated in the resulting auction but didn't win.

Yet he went away sufficiently impressed to retain Wormsley two years later to sell William Hill plc. Although Hands had already appointed UBS to take the British gaming firm public, an 11th-hour reassignment enabled Wormsley to sell William Hill to London private equity shop Cinven Ltd. for an amount well above what an initial public offering would have delivered.

In January 2000, when British merchant bank Schroders sold its investment banking arm to Citi, Wormsley joined the migration to the new owner. Two years later, when Hands spun out Terra Firma from Nomura Holdings Inc., Citi not only helped set up the private equity shop but acted as its fundraising placement agent.

The complaint estimates that, excluding EMI, Citi's relationship with Terra Firma has since yielded more than £136 million in fees from nearly 20 transactions collectively valued at $57 billion. EMI alone, meanwhile, is credited with fattening Citi coffers by £92.5 million.

Hands' receptivity to and reliance on Wormsley is manifest throughout the complaint. After the investment banker reached out to the private equity player in late 2006 about his interest in EMI, a Terra Firma deal team concluded in less than two weeks that the music company "constituted an attractive takeover target." And when Wormsley advised Hands to submit "an indicative bid of £2.65 per share in order to enter the process and obtain access to due diligence materials," it took only two days for his firm to do just that.

Hands also came through on hearing from Wormsley that approval of a £3 billion credit package -- hastily arranged by Citi's credit committee to facilitate Terra Firma's purchase of EMI -- was contingent on the firm's "promptly making a binding offer." This tying of Terra Firma's financing to a binding bid may warrant an investigation in its own right, especially considering the suit's claim that EMI's board suddenly gave the auction an "accelerated deadline."

The two days cut off the original target date for bids ostensibly hurt Terra Firma the most. The firm, the last to enter the contest, was 10 days behind other auction participants and Citi itself in gaining access to an electronic data room set up by EMI to assist in due diligence. Hence the suit's assertion that, as a latecomer to an auction given an earlier deadline, Terra Firma had but one lender option:

"No other banks could commit by Monday morning to underwriting all of the financing necessary for Terra Firma's bid. Citi's approval process for the financing took less time than other banks would have needed because Citi was able to leverage its previous knowledge and experience with EMI, including its access to due diligence information that was not provided to Terra Firma."

That Citi knew more than Terra Firma about EMI is attributable, again, to Wormsley. Never mind that EMI's board picked Greenhill & Co. International LLP as its official financial adviser (an acknowledgment of potential conflicts arising from Citi's close ties to private equity that an EMI auction would try to excite), the suit contends Wormsley continued in such roles as buy-side adviser, commercial-lending contact and even sell-side investment banker.

If banking is like chess, where advantages accrue to those who correctly anticipate the next move or two, then the privileged views of Wormsley's many contacts gave the banker considerable advantage. But that's not to detract from Wormsley's own cleverness and doggedness at parsing the music business as it underwent wrenching changes.

For example, when Time Warner Inc. decided to sell Warner Music Group, EMI's M&A advisers were UBS and Goldman, Sachs & Co. Both encouraged EMI to focus on merging with WMG rather than on pursuing a bond placement already under way. Citi, in contrast, helped EMI stay the course with its bond placement while simultaneously assembling a financing package in the event that a takeover of WMG finally came to pass.

Citi's proved the better guidance, a development appreciated by EMI after a private equity consortium led by Edgar Bronfman Jr. won the auction for WMG in November 2003. "Thus, by the end of 2003, Citi had emerged as the lead bank for EMI, acting as both mergers and acquisitions advisor and lead lending bank," the complaint states.

In 2006, after EMI and WMG each made an unsuccessful bid for the other, the suit resumes its narrative, with Citi encouraging "EMI to take a new and different path ... to sell itself to a private equity fund." EMI bit, the lawsuit continues, designating Citigroup, Greenhill and Deutsche Bank AG its three outside advisers.

But with its fortunes rapidly declining to the point that a debt-covenant trip seemed imminent, EMI switched gears again in early 2007. That's when it embarked on Project Pepe, an acronym for Private Equity in the Public Environment. The project promised a radical restructuring of EMI -- not unlike one that a private equity firm might undertake -- while still a public company.

Central to Pepe's success was to have been the securitization of copyrights owned by EMI's music-publishing division, a Beatles-led catalog believed by many to be the world's most valuable. "The securitization would provide debt to EMI at lower rates," the complaint explains, "and the banks (including Citi) would eliminate their exposure to EMI's debt because the securitization was expected to raise sufficient cash to pay down the newly refinanced facilities."

Project Pepe had a precedent in so-called Bowie Bonds, securities issued in 1997 that discounted future royalty payments for David Bowie's music.

Only EMI's initiative would have been more complicated and time consuming, thereby generating larger fees and greater recognition.

Much to Citi's disappointment, EMI awarded the securitization assignment to Deutsche Bank and Royal Bank of Scotland Group plc. The suit accordingly notes that "Citi would therefore not receive the voluminous fees -- nor the reputational boost from executing a far more complex project than the original Bowie Bonds."

But then WMG showed up again with another unsolicited offer, one low enough this time to renew the interest of EMI management in a private equity solution instead of a merger of strategics. Citi liked this solution, too, but for reasons the suit construes as self-serving.

EMI's sale to private equity not only stood a good chance of producing financial advisory fees, it points out, but also "a second bite at the securitization apple." The solution also held promise as an interim measure with the added benefit of delaying, but not diminishing, Citi's ultimate payday from EMI: an eventual sale to WMG.

"It would have been clear to Citi that the issues about who would manage an EMI/Warner entity -- issues that had previously hindered merger efforts -- would be greatly diminished if EMI were owned by a private equity firm," the complaint says.

"And Citi stood to earn substantial additional revenue as advisor and possibly a financier to the backers of EMI in a combination with Warner, with the possibility of further work to be obtained from the merged entity," it adds.

Terra Firma isn't alone in suggesting that Citi still considers EMI's endgame a sale to WMG. Last November, with the bank and PE firm deadlocked about the capitalization of EMI, Pali Capital Inc.'s Richard Greenfield interpreted Citi's rejection of a Terra Firma offer to inject a further £1 billion of equity into the music company, provided Citi forgave the same amount in EMI debt, as prologue to the same scenario.

After noting that Citi still holds all £2.5 billion of EMI debt from Terra Firma's leveraged buyout, having been unable to syndicate any of it, the analyst wrote: "We continue to believe the best way for Citigroup to maximize the value of the debt it holds in EMI is to push for a break-up of the company, selling EMI's recorded music division to Warner Music and either leaving Terra Firma with EMI's music publishing arm or auctioning the asset to another bidder."

How the suit influences this plausible endgame remains to be seen. Citi litigation counsel Paul, Weiss, Rifkind, Wharton & Garrison LLP declines comment beyond confirming the case will be handled by Brad Karp, the law firm's chairman, and Ted Wells Jr., co-chairman of the litigation department.

One lawyer conversant with this type of litigation predicts that, if discovery corroborates allegations presented in the complaint, the case will largely rest on delineations between what he calls the securities model and the M&A model. The securities model, an outgrowth of the Securities Act of 1933 and the Securities Exchange Act of 1934, essentially protects investors from themselves by having businesses address risks that potential security buyers otherwise might not even consider. The M&A model, in contrast, assumes that those involved in such endeavors bring a degree of sophistication to negotiations that renders securities-like disclosures irrelevant.

"I would argue that you're a big private equity firm, and valuing companies is what you do," this lawyer says. "Whatever bid you submitted must have made financial sense when you submitted it. So any case you make after the fact is basically sour grapes." Yet, when asked if the M&A model even condones the sort of gamesmanship that Terra Firma claims took place in the EMI auction, the lawyer admits his argument may have little appeal outside the investment banking community.

Jonathan Braude contributed to this article.