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Slideshow: Carlyle Group Details Legal Troubles

Either The Carlyle Group is involved in more lawsuits than its peers or it is simply being more forthcoming about its legal proceedings in its S-1, filed today with the SEC. “From time to time we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business. Our businesses are also subject to extensive regulation, which may result in regulatory proceedings against us,” Carlyle’s S-1 states, as did (more or less) the S-1s of Blackstone, Apollo, and KKR. However, it also goes on to give a fairly detailed account of the various legal proceedings with which it’s involved, as you can see in the slideshow below, arranged by oldest to newest dilemmas. (Quotes below are excerpts from the S-1.) Suits arising from the 2008 blow-up of a Carlyle Capital Corp., a fund earmarked for mortgage securities, appear to be among the most serious.

In its S-1, filed in July 2007, KKR pretty much left it at, Hey, we might get sued sometimes, but we don’t think it will impact us all that much. Apollo acknowledged legal questions in its S-1, filed in April 2008, saying, “… we are of the opinion, after consultation with counsel, that the resolution of any such matters to which we are a party at this time will not have a material adverse effect on our financial statements,” without going into detail. Similarly, Blackstone’s S-1, filed in March 2007, stated that “We are not currently subject to any pending judicial, administrative or arbitration proceedings that we expect to have a material impact on our results of operations or financial condition.”

Bernard Vaughan is a Senior Editor at Buyouts Magazine. Follow his tweets @BVaughanReuters.


[slide title=”Club Deal Fallout”]

“In September 2006 and March 2009, we received requests for certain documents and other information from the Antitrust Division of the DOJ in connection with the DOJ’s investigation of global alternative asset management firms to determine whether they have engaged in conduct prohibited by U.S. antitrust laws. We have fully cooperated with the DOJ’s investigation….”



[slide title=”More Club Deal Fallout”]

“On February 14, 2008, a private class-action lawsuit challenging ‘club’ bids…was filed in the U.S. District Court for the District of Massachusetts. The complaint alleges…that certain global alternative asset management firms, including Carlyle, violated…the Sherman Act by…forming multi-sponsor consortiums for the purpose of bidding collectively in certain going private transactions, which the plaintiffs allege constitutes a ‘conspiracy in restraint of trade.’ While Carlyle believes the claims are without merit and will vigorously contest all claims, it is difficult to determine what impact, if any, this litigation …will have on the private equity industry generally or on Carlyle.”

[slide title=”New Mexico Pay-to-Play Scandal”]

In 2009, Carlyle was named in a lawsuit for allegedly providing a $150,000 “kickback” to disgraced political adviser Hank Morris (pictured), who earlier this year was sentenced to up to four years in prison for his role in a pay-to-play scandal in New York. From the S-1. “Along with many other companies and individuals in the financial sector, Carlyle and one of our funds, Carlyle Mezzanine Partners, are named as defendants in Foy v. Austin Capital, pending in New Mexico state court…The suit alleges that investment decisions by New Mexico public investment funds were improperly influenced by campaign contributions and payments to politically connected placement agents. In May 2011, the Attorney General of New Mexico moved to dismiss certain defendants including Carlyle …on the ground that separate civil litigation by the Attorney General is a more effective means to seek recovery for the State from these defendants. The Attorney General has brought two civil actions against certain of those defendants, not including the Carlyle defendants. The Attorney General has stated that its investigation is continuing and it may bring additional civil actions. We are currently unable to anticipate when the litigation will conclude, or what impact the litigation may have on us.”

[slide title=”Carlyle Capital Corp. Blows Up”]

In July 2009, Michael Huffington (pictured) sued Carlyle, alleging it misrepresented the safety of the publicly traded mortgage securities fund in which the former California congressman and ex-husband of Arianna Huffington placed $20 million in 2007, only to watch the fund implode a year later. From the S-1: “The plaintiff lost its appeal to the First Circuit and has filed a renewed claim in Delaware state court. Defendants are vigorously contesting all claims alleged by the plaintiff. Another CCC investor has instituted legal proceedings on similar grounds in Kuwait against Carlyle seeking to recover losses incurred in connection with an investment in CCC. We believe the claims are without merit and will contest vigorously all claims….”

[slide title=”More Fallout From Carlyle Capital Corp.”]

“The Guernsey liquidators who took control of CCC in March 2008 have filed suit against Carlyle…seeking $1.0 billion in damages. They allege that Carlyle and the CCC board of directors were negligent, grossly negligent or willfully mismanaged the CCC investment program and breached certain fiduciary duties allegedly owed to CCC and its shareholders. Plaintiffs further allege (among other things) that the directors and Carlyle put the interests of Carlyle ahead of the interests of CCC and its shareholders and gave priority to preserving and enhancing Carlyle’s reputation and its ‘brand’ over the best interests of CCC. We believe the claims are without merit and will vigorously contest all allegations. We recognized a loss of $152.3 million in 2008 in connection with the winding up of CCC….”

[slide title=”And Yet More Fallout From Carlyle Capital Corp.”]

“In June 2011 and August 2011, two putative shareholder class actions were filed in the United States District Court for the District of Columbia against Carlyle, certain of our affiliates and former directors of CCC alleging that the fund offering materials and various public disclosures were materially misleading or omitted material information. We believe the claims are without merit and will vigorously contest all claims.”