D.C. Federal Judge Dismisses Carlyle Capital Securities Lawsuit

D.C. Federal Judge Dismisses Carlyle Capital Securities Lawsuit

In an interesting opinion that includes among other things a noteworthy discussion of issues arising under the Morrison v. National Australia Bank case, one of the last securities suits filed as part of the ed credit crisis-related litigation wave has been dismissed. In an August 13, 2012 opinion (here), District of Columbia District Court Judge Amy Berman Jackson has dismissed the securities class action lawsuit that had been filed against the failed Carlyle Capital Corporation in the wake of its March 2008 collapse.


As discussed here, in one of the last cases to be filed as the subprime and credit crisis-related litigation wave wound down, in June 2011, a plaintiff filed a securities class action complaint in the U.S. District for the District of Columbia against certain individual officers and directors of the now defunct Carlyle Capital Corporation (CCC), its investment manager and related entities. The action was filed on behalf of two groups of claimants: those who bought Restricted Depositary Shares (RDS) in the company's July 2007 RDS offering; and those who purchased Class B shares on the Euronext exchange between the offering and the companies March 2008 demise. The complaint asserts claims under the federal securities laws; for common law misrepresentation; and for violation of the Dutch and UK securities laws.

The complaint alleges that CCC was organized under the laws of Guernsey to profit from the spread between the its portfolio of residential mortgage-backed securities (RMBS)and the cost of financing those assets through short term repurchase agreements and other forms of financing. Its principal place of business was in Washington, D.C. The complaint alleges that the entity was a "house of cards" because it was committed to acquiring "volatile, risk-securities that could only be purchased using massive borrowing with the securities purchased serving as collateral." The company's RMBS portfolio deteriorated during 2007, even prior to the company's offering. The complaint alleges that the deterioration and the liquidly issues associated with the companies repo agreement financing were not disclosed to investors.

The complaint alleges that following the offering, the defendants continued to misrepresent the company's financial condition, particularly with respect to its RMBS portfolio. Despite the deteriorating market for RMBS, CCG continued to acquire additional RMBS. The complaint alleges that as the marketplace nearly reached a "meltdown" in August 2007, the company did not recognize its portfolio losses. In early 2008, a cascade of margin calls forced the company's managers to put the company into liquidation under the authority of the Royal Court of Guernsey. The defendants moved to dismiss.

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Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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