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Blackstone faces class action suit

The alleged cover-up of poor performance at portfolio companies Freescale and FGIC are the main claims of the plaintiff, represented by a law firm that is filing a number of similar suits against major financial services firms.

The Blackstone Group is being sued by Landmen Partners for allegedly concealing poor portfolio company performance in the prospectus for its June 2007 initial public offering.

The suit, filed by law firm Coughlin Stoia Geller Rudman & Robbins and seeking class action status, alleges that the prospectus “contained untrue statements of material facts, omitted to state other facts necessary to make the statements not misleading and was not prepared in accordance with the rules and regulations governing its preparation”.

“The suit is specious, and Blackstone expects to prevail,” a source close to the buyout firm said.

The plaintiff, who an attorney at the law firm would identify only as “an investment partnership”, contends that by the time the prospectus was filed, two of the firm’s portfolio companies, FGIC Corporation and Freescale Semiconductor, were “materially impaired”. 

Blackstone bought its 23 percent interest in FGIC, General Electric’s financial guaranty business, in 2003. Blackstone was part of a consortium, along with The Cypress Group, CIVC Partners and mortgage insurer PMI, that paid $2.16 billion including debt for an 88 percent interest in the company. The suit alleges that one of FGIC’s arms, Financial Guaranty, was hurt when it began to shift its focus in recent years from conservative municipal bonds to collateralised debt obligations, some of which were backed by subprime mortgages.

Blackstone, Permira, TPG and The Carlyle Group paid $17.6 billion to take Freescale private in 2006. At the time industry observers noted that Freescale was 20 times more leveraged than the entire semiconductor industry. Earlier this month, the consortium wrote down the value of their $7 billion equity stake in the company by $1 billion.

Because Blackstone is subject to a clawback provision, the suit says, poor performance at these companies could force the firm to return anticipated performance fees to its limited partners, hurting the value of the general partnership.

Coughlin Stoia said in a statement it intends to “aggressively pursue litigation on behalf of defrauded investors” at other institutions that have lost value from subprime mortgage-related investments. The law firm is representing clients who have filed similar lawsuits against Citigroup, Merrill Lynch, Washington Mutual, Ambac, Countrywide Financial, the Federal Home Loan Mortgage Corporation, Huntington Bancshares, UBS AG, and “a host of other institutions” in order to recoup subprime losses.

Blackstone went public on the New York Stock Exchange in June 2007 at $31 per share. Its stock has fallen in the intervening months and is currently trading at $18.88 per share.