The relationship between private equity firms and their investment banks can turn testy for a lot of reasons. The big private equity funds have all considered starting up their own banking operations. Kohlberg Kravis, Roberts has already made strides in this direction.

The dispute between Citigroup (NYSE: C) and Terra Firma is case where the tension has exploded into court and into the headlines. The dispute centers on advice David Wormsley, a Citigroup banker, gave Terra Firma regarding its bid for EMI.

The private equity firm alleges that the banker misled Terra Firma into believing Cerberus was still interested in bidding for EMI. That led Terra Firma to make a higher bid. Citi denies the allegations.

Terra Firma ultimately bought the company, which is reeling. The deal has proven disastrous for Terra Firma. It has written off much of its investment in the company and continues to inject cash to avoid breaching loan covenants.

A Judge has ruled that a trial can proceed on two grounds: fraudulent misrepresentation and fraudulent concealment. The charges of negligent misrepresentation and tortuous interference were dinged by another judge.

This could get very interesting. Some big names in the U.K. financial scene may be called to the stand in New York. And Terra Firma has inked superstar lawyer David Boies to argue its case.

For more:
- here's some background from The Telegraph

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