A Washington federal judge has dismissed a securities fraud lawsuit against an investment arm of The Carlyle Group L.P., finding that while the plaintiffs may have had concerns about how the company was being run, they failed to prove fraud.
In a series of class actions filed last year in U.S. District Court for the District of Columbia, the plaintiffs – former shareholders of Carlyle Capital Corp. Ltd. – accused company officials of failing to disclose financial problems during its initial public offering in 2007 and then concealing the company's worsening condition before it collapsed the following year.
In an opinion (PDF) published yesterday, U.S. District Judge Amy Berman Jackson found that Carlyle Capital's disclosures did put shareholders on notice of how the company was being run and also that the plaintiffs had failed to link any alleged fraud to their losses.
"This complaint is an attack on how [Carlyle Capital] was managed, and ultimately, it questions the wisdom behind the adoption of its business model in the first place," Jackson wrote. "But chiding [Carlyle Capital] with the benefit of hindsight for its failure to resist the stampede to purchase mortgage-backed securities is not the same thing as alleging fraud."
Carlyle Capital was created in 2006 with a focus on mortgage-backed securities. As the mortgage market declined, the company wasn't able to pay back its lenders and was placed in liquidation in March 2008.
The class action boiled down to claims related to the periods just before and just after the initial public offering. The plaintiffs claimed that before the offering, Carlyle Capital told potential investors about possible risks but failed to disclose that it was already facing financial problems.
Jackson found that Carlyle Capital did disclose losses and other problems, including liquidity issues, leading up to the offering, even if the company didn't highlight it in a way that was as "alarming" as how that information was being discussed internally.
Even if the plaintiffs had made sufficient fraud claims, Jackson said, they still failed to connect that alleged fraud to any losses. "Reading the complaint as whole, it is appears that the theory underlying this case is that [Carlyle Capital] was doomed from the start," she wrote. "Plaintiffs may have a point, but following a misguided plan, or even mismanaging a viable plan, is not tantamount to securities fraud, particularly when the details of [Carlyle Capital]'s investment strategy and the attendant risks were plainly disclosed in detail in the Offering Memorandum."
After the offering, the plaintiffs claimed, company leaders misrepresented that they would stick with their investment guidelines, but Jackson found that these claims failed because the offering disclosures noted that the company could vary from those guidelines.
A lead counsel for the plaintiffs, Jonathan Cuneo of Washington's Cuneo Gilbert & LaDuca, said in an email that "we are studying the Court's lengthy ruling and reviewing our options to make recommendations to our clients about next steps."
The defendants, which include companies and individuals involved in managing Carlyle Capital, were represented by attorneys from Williams & Connolly. Firm partner and lead counsel Robert Van Kirk could not immediately be reached for comment this morning.