Earlier this month, shareholders filed a securities class action against Blackstone Group L.P. (“Blackstone”), its CEO and its CFO over their alleged failure to warn investors that some of the investments managed by Blackstone were performing poorly and that Blackstone was at risk of having to pay back some of its performance fees. Landmen Partners Inc. v. The Blackstone Group L.P., et al., No. 08-CV-36102 (S.D.N.Y. April 15, 2008).
The suit was brought on behalf of investors who purchased shares of Blackstone in its highly touted IPO last year. Those investors now claim that the Registration Statement and Prospectus issued in connection with the IPO were materially false and misleading because they failed to disclose these risks. According to the complaint, Blackstone is an asset manager and financial services firm that makes its money primarily through management and performance fees. The complaint alleges that Blackstone typically serves as a general partner in partnership entities that it creates. Blackstone then charges those partnership entities a management fee of 1.5% of assets under management and a performance fee of 20% of the profits achieved by the partnership entities’ investments. The complaint, however, alleges that Blackstone is subject to a “claw-back” provision, under which it must return performance fees that it received in the past if the investments subsequently under-perform.
The shareholders claim that the defendants knew that certain assets were performing poorly and were declining in value at the time of the IPO, but failed to disclose those facts in either the Registration Statement or Prospectus, violating Sections 11 and 15 of the Securities Act of 1933. The shareholders give as an example investments in FGIC Corporation (“FGIC”), which they claim was performing poorly at the time of the IPO. FGIC, which has been the subject of substantial press lately regarding its subprime losses, owns bond insurer Financial Guaranty. Financial Guaranty provides bond insurance that protects investors against securities defaults. According to the complaint, Blackstone owns twenty-three percent (23%) of FGIC that it purchased as part of a consortium with PMI Group Inc. and Cypress Group.
The shareholders claim that Financial Guaranty traditionally provided insurance primarily for conservative municipal bonds. According to the shareholders, however, Financial Guaranty began insuring collateralized debt obligations (CDOs) in recent years as those bonds became increasingly popular. The CDOs insured by Financial Guaranty included those backed by subprime mortgages. The shareholders claim that when the subprime mortgage market “plunged” in value last year, it increased Financial Guaranty’s exposure to defaults.
The shareholders give no other examples of allegedly non-disclosed underperforming investments. However, they allege that the defendants failed to disclose similar problems with other investments at the time of the IPO, including not only problems with Blackstone’s own investments, but also problems with the investments made by the partnership entities Blackstone manages. According to the shareholders, the risks faced by those investments increased the risk that Blackstone’s performance fees would be “clawed-back.” They then argue that when those risks became known to the investing public, Blackstone’s stock declined sharply in value. The only example they give, however, is the March 10, 2008 press release by Blackstone in which it reported that it had taken a $122.9 million write-down on its investment in FGIC.
A copy of the shareholder complaint is available here. We will continue to monitor these events and report any new developments at www.InsureReinsure.com.
