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.
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. Carlyle Group, co-founded by David Rubenstein, wound up the fund seven months after its initial public offering.
Carlyle Group officials said they’d defend themselves against the fund liquidators’ claims. The liquidators also filed suit over the investment losses in state court in Manhattan today.
“We will vigorously contest all claims and are confident we will prevail,” Chris Ullman, a company spokesman, said.
‘Bet the Farm’
Carlyle Capital raised $945 million in equity funding and sought to generate annual returns of at least 12 percent by investing in residential mortgage backed securities and “leveraged finance assets,” the liquidators’ lawyers said in the Delaware suit.
The company’s business model called for leverage equaling 19 times capital, the suit said, noting that the actual leverage employed exceeded 30 times capital.
“CCC’s losses were the direct result of a determinedly reckless ‘bet the farm’ approach, brazenly pursued in the self-interests of the Carlyle Group,” the Delaware suit said.
Ullman countered in an interview that Carlyle, its executives and employees lost more than $230 million in the fund’s collapse.
The losses were a result of “unprecedented” tumult in the mortgage-backed securities market, Ullman added. Washington- based Carlyle has more than $90 billion under management he noted.
$1.8 Trillion Loss
Mortgage securities were among the biggest contributors to writedowns and credit losses of almost $1.8 trillion since the start of 2007 at the world’s largest banks, according to data compiled by Bloomberg.
S&P has issued at least one downgrade to $2.3 trillion of $3.3 trillion of U.S. residential securities created in 2005, 2006 and 2007, and last year it lowered approximately $3.5 trillion of about $10 trillion of securitized debt it rates worldwide, based on original balances, according to a March report from the rating company.
The market for agency mortgage bonds, which reached a peak of $5.4 trillion in February, declined by about $133 billion in the first half of this year, as Fannie Mae and Freddie Mac bought delinquent loans out of their securities to reduce their expenses, according to Bank of America.
The Delaware case is Carlyle Capital Corp. Ltd. v. William Elias Conway Jr., CA5625, Delaware Chancery Court (Wilmington).