Carlyle Hit with Suit over Collapsed Mortgage Fund

NEW YORK (Reuters) – Carlyle Group is being sued by the liquidators of a failed mortgage-securities fund that was set up by the private equity group, a spokesman for the liquidators said.

The lawsuit, which is being filed in the United States and Europe, alleges that Carlyle Group and the former directors of the mortgage-securities fund, Carlyle Capital Corp, breached their fiduciary duty to investors in the more than $1 billion fund, which collapsed in 2008.

The fund, set up in 2006, was publicly traded in Europe beginning in July 2007.

A copy of the complaint alleges that in the “short space of eight months the entirety of CCC’s capital was spectacularly lost under the reckless and grossly negligent direction, supervision, management and advice of the defendants.”

At its peak, Carlyle Capital, based in Guernsey in the Channel Islands, managed $21 billion of mostly residential mortgage securities.

In 2007, the fund generated about $20 million in fees for the private equity firm, according to the liquidators with the restructuring firm Begbies Traynor.

When Carlyle Capital collapsed in March 2008, it had more than $16 billion of debt — mostly loans extended by banks.

“This suit is without merit. We will vigorously contest all claims and are confident we will prevail,” said Carlyle Group spokesman Christopher Ullman.

 

This is the second time Washington, D.C.-based Carlyle has been sued over the collapse of the mortgage investment fund.

 

A year ago, former California Republican congressman Michael Huffington sued Carlyle, claiming he lost his entire $20 million investment in Carlyle Capital. Huffington is the former husband of HuffingtonPost founder Arianna Huffington.

The lawsuit by the liquidators alleges Carlyle Capital was overly leveraged and and relied on too much short-term borrowing to invest in mortgage-backed securities at a time the U.S. housing market was beginning to crumble.

The liquidators contend Carlyle, in the second half of 2007, delayed taking the necessary steps to raise capital for the fund and sell off some of its mortgage-related assets.

Carlyle Capital was not the private equity firm’s only bad experience with residential real estate. A $900 million hedge fund set up by Carlyle called Blue Wave also closed in 2008 after sustaining heavy losses on investments in mortgage-related securities. 

Reuters reported in June that Blue Wave was investor in a collateralized debt obligation called Timberwolf that was underwritten by Goldman Sachs Group. The Timberwolf CDO, which was the focus of a recent congressional hearing, lost 80 percent of its value five-months after Goldman began selling it to investors in the spring of 2007.

The Carlyle Capital lawsuit, which names the investment management arm of Carlyle Group as a defendant, is being filed in Guernsey and in federal courts in New York, Delaware and Washington, D.C. (Reported by Matthew Goldstein; Editing by Maureen Bavdek and Steve Orlofsky)