Wednesday, July 7, 2010

Carlyle Group's Latest Defense: Unprecedented Tumult

Carlyle Capital Corporation (CCC) went belly up seven months after its independent public offering. It was one canary in financial crisis coal mine. Bloomberg reported on the latest CCC investor lawsuit:

Carlyle Group, the world’s second- largest private-equity firm, was sued by liquidators of the buyout company’s defunct mortgage bond fund, saying executives lost $945 million in overly risky investments.

Liquidators for Carlyle Capital Corp. Ltd, a Guernsey, Channel Islands-based hedge fund that collapsed in March 2008, contend Carlyle directors turned a blind eye to questionable investments in residential mortgage-backed securities and failed to stop the loss of all the company’s capital, according to a lawsuit filed in Delaware.

“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,” the liquidators said in the suit, filed today in Delaware Chancery Court.

Carlyle promised an aggressive defense, a pattern for the private equity underwriter.

“We will vigorously contest all claims and are confident we will prevail,” Chris Ullman, a company spokesman, said.

The losses were a result of “unprecedented” tumult in the mortgage-backed securities market, Ullman added.
That "unprecedented tumult" expressed as margin calls on Carlyle's highly leveraged Guernsey fund.

Lenders seized Carlyle Capital’s assets after it failed to meet more than $400 million of margin calls on mortgage-backed collateral that had plunged in value.
Where would Carlyle be if CALPERS behaved similarly? The Carlyle Group made $680 million in capital calls to CALPERS during the financial crisis. Unlike Carlyle, CALPERS stood behind their investment.

Currently, Carlyle has other aggressive legal defenses. In a SemGroup investor lawsuit, Carlyle claimed puffery as its defense. In LifeCare's wrongful patient death lawsuits, Carlyle blames the feds, claiming patients became wards of the federal government when FEMA evacuation teams set up in New Orleans. LifeCare deaths came during another unprecedented disaster, Hurricane Katrina.

Carlyle works to delay justice, that is clearly precedented. How will Delaware judge Carlyle Capital Corp. Ltd. v. William Elias Conway Jr., CA5625, Delaware Chancery Court? Stay tuned.

Update: The lawsuit contends that Carlyle siphoned off $20 million in management fees while the fund only had $75 million to meet margin calls.