Michael Huffington, a wealthy investor, is suing David Rubenstein and the Carlyle Group for misrepresentations and deceptions in the marketing of Carlyle Capital Corporation (CCC), the Channel Islands investment vehicle that imploded in March 2008. Forbes reported:
Carlyle "offered to sell shares of stock in the fund by knowingly or negligently representing that, among other things, the fund was 'conservative,' 'low risk' and that the 'downside [was] very limited,'" according to the suit.
Huffington lost the full value of his $20 million investment in CCC when the fund blew up.
Huffington alleges the losses were a "direct result of the extremely risky 32:1 leverage ratio." Carlyle Capital was hit with margin calls when its assets lost value, and in March 2008 Rubenstein personally called Huffington to tell him the fund was in default on its debt and that Carlyle Capital's lenders were selling the collateral.
But that was during dark days. CCC used about $670 million of equity to amass a $22 billion portfolio of mortgage debt. For every dollar of equity, the pool borrowed $32. Mr. Huffington supplied nearly 3% of the initial equity. Arthur Levitt, Carlyle Group Senior Adviser, attributed the failure to "excessive leverage."
In May 2008, Rubenstein went to Boston to personally apologize for the losses and explain how they happened, according to the lawsuit. Rubenstein, however, said that his Carlyle partners would not let him cover Huffington's losses. Instead, Rubenstein said Huffington would have the opportunity to invest with Carlyle in the future without paying fees. They shook hands on it. "I guarantee you that you will get your money back," the suit quotes Rubenstein telling Huffington the next day over the phone.
Fortunately, the Obama administration brought back the light, counting on private equity to save banks, build infrastructure, reform healthcare, and improve education. Yes, they'll make it back in droves. The Government Industrial Monstrosity assures it.
Arthur Levitt and David Rubenstein led efforts to reform the world's financial system. Might private equity underwriters (PEU's) come out on top? They're shopping for distressed banks. Think what the PEU boys can do with captive lending institutions. Next time you pull up to a PEU owned bank, recall it took CCC a year to lose Mr. Huffington's $20 million.