Powerful Private Equity Firm Sued Over 'Reckless' Mortgage Fund

Powerful Private Equity Firm Sued Over 'Reckless' Mortgage Fund

The world's second-biggest private-equity firm was sued this week over its "reckless and grossly negligent" management of a failed mortgage bond affiliate that cost investors nearly $1 billion, according to suits filed in Delaware and New York.

The Carlyle Group, which oversees more than $90 billion across six continents, stands accused of paying its executives "excessive and unjustified" fees while managing its hedge fund, Carlyle Capital Corporation, into the ground, the Financial Times and Bloomberg News report, citing the two lawsuits. CCC, which invested in mortgage-backed securities and "leveraged finance assets," collapsed in March 2008 after it "failed to meet more than $400 million of margin calls on mortgage-backed collateral," Bloomberg reports.

By the end of 2007 the fund had $21 billion in debt but just $75 million to meet margin calls, the FT reports, citing the lawsuit.

Investors in the fund allege that Carlyle Group officials took more than $20 million in fees and more than $50 million in other benefits, the FT reports, citing the lawsuit, despite that within a year the failed hedge fund had unrealized losses exceeding $270 million.

"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," Bloomberg reports, citing the lawsuit. The Carlyle Group "preferred" its own "corporate interests" over that of the hedge fund, the lawsuit alleges, according to the FT.

The $945 million hedge fund sought annual returns of at least 12 percent, according to the Delaware-filed suit, Bloomberg reports. While the fund called for leverage of about 19 times capital, the actual leverage exceeded 30 times capital, Bloomberg reports, citing the lawsuit.

"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," Bloomberg reports, citing the lawsuit.

Officials at the Carlyle Group said they would contest the claims. They also noted that their own employees lost $230 million on the failed fund, Bloomberg reports.

The Carlyle Group has more than 880 employees spread over 19 countries, the firm's website notes. It's invested more than $60 billion of equity in 969 deals since 1987, and its current deals generate $84 billion in revenue and employ nearly 400,000 people around the world.

Popular in the Community

Close

What's Hot