Private equity firm, Terra Firma, owner of the UK-based EMI Group is suing Citigroup on the grounds that the New York-based investment bank "misrepresented fundamental facts" when it acquired EMI in 2007.

In May 2007, Terra Firma, which has invested approximately €13 billion of equity mainly in Europe, had acquired EMI, the world's third largest music company for £2.4 billion in cash. (See: EMI agrees $4.7 billion offer from Terra Firma)

London-based Terra Firma, formed through the spin-off of Nomura Group's principal finance group in 2002 by British financier  and investor Guy Hands, has filed a lawsuit in New York state court on Friday alleging that Citigroup, which brokered the sale of EMI Group had artificially inflated the price of the music publisher during the takeover in 2007 by falsely claiming that other bidders were in the race.

Terra Firma is accusing Citigroup, which made about $185 million from the sale through services, of intentionally inflating EMI's price by misrepresenting fundamental facts that there was another interested bidder for the company and that it was trying to bring about a long-awaited merger of EMI with rival Warner Music, which was also in the race to acquire EMI in 2007. (See: Warner may re bid for EMI)

Citigroup, which holds about $4.2 billion of EMI debt, had released a research note made by one of its leading analyst eight weeks back, where the analyst stated that there is a likelihood of EMI going bust if it does not merge with Warner Music.

Citigroup had arranged for the sale of EMI through an auction in 2007 and three interested bidders dropped out of the auction, which left only Terra Firma, according to the complaint.

But Terra Firma says in its complaint that David Wormsley, Citigroup's London-based banker had misrepresented facts by saying that Cerberus Capital Management was also an interested bidder in the auction, which made Terra Firma make a binding offer for EMI.

Terra Firma says in its suit that it would not have raised its bid to £2.4 billion, had it known that it was the only bidder left in the race to buy EMI.

Apart from being a advisor to EMI, Citigroup had also financed Terra Firma for the acquisition and saddled with a debt of £2.6 billion, Terra Firma had tried to restructure the debt by asking Citigroup to write off £1 billion of the EMI loan in exchange for Terra Firma pumping in another £1 billion of equity, which was turned down by the banker.

Terra Firma is alleging that Citigroup, as the major creditor, is trying to take control and sell EMI at a profit.