MANHATTAN (CN) – The 2nd Circuit overturned a District Court’s ruling – and its math – in a unanimous decision that revives a class action lawsuit against the Blackstone Group.
In 2009, the District Court said that Blackstone’s undisclosed $122 million investment in the company FGIC “represented a mere 0.4% of Blackstone’s [total $3.12 billion] assets under management” at the time it raised $4.1 billion in its initial public offering.
The federal appeals court punched the numbers differently in a footnote to its overturned ruling.
“In fact, $122 million is nearly 4% of $3.12 billion,” the ruling, released Thursday, states.
Three shareholders joined the Landmen Partners in a class action against the Blackstone Group and its executives, Stephen Schwarzman, Michael Puglisi, Peter Peterson and Hamilton James.
They claimed that Blackstone concealed problems being experienced by two of its portfolio companies and other real estate fund investments when it raised $4.1 billion in its initial public offering.
Blackstone was among a consortium of investors that purchased an 88 percent interest in FGIC from General Electric for $1.86 billion in 2003. FGIC is a monoline financial guarantor and the parent company of Financial Guaranty, which primarily provides insurance for bonds.
Through this acquisition, Blackstone started buying collateralized debt obligations, some of which were backed by subprime mortgages to higher-risk borrowers.
Then in 2006, Blackstone invested $3.1 billion in Freescale, accounting for 9.4 percent of a division’s assets under management and 3.5 percent of Blackstone’s total assets under management.
Shortly before the IPO, Freescale lost an exclusive agreement to manufacture wireless 3G chipsets for its largest customer, Motorola, and Blackstone did not alert shareholders of this development, Straub wrote.
The appellate judges say that there is “no indication in the record” as to how much Blackstone spent on real estate investments or the number of projects it supported.
While the District Court held that the shareholders could not file suit against Blackstone because they failed to prove fraudulent misrepresentation, the appeals court disagreed.
“Notably, plaintiffs’ complaint explicitly does not allege fraud; rather, it alleges that Blackstone acted negligently in preparing its Registration Statement and Prospectus,” Judge Chester Straub wrote for the court’s three-judge panel.
Omissions or misrepresentations about Blackstone’s assets give the shareholders eligibility to sue, Straub added, finding that the shareholders could not have learned about the investments from the public record.
“In this case, the key information that plaintiffs assert should have been disclosed is whether, and to what extent, the particular known trend, event, or uncertainty might have been reasonably expected to materially affect Blackstone’s investments,” Straub wrote. “And this potential future impact was certainly not public knowledge, particularly in the case of FGIC, which was not even mentioned in Blackstone’s registration statement and thus cannot be considered part of the ‘total mix’ of information already available to investors.”
Blackstone contended that its other investments could have offset those in FGIC and Freescale, but the appellate judges were unconvinced.
“Blackstone is not permitted, in assessing materiality, to aggregate negative and positive effects on its performance fees in order to avoid disclosure of a particular material negative event,” Straub wrote. “Were we to hold otherwise, we would effectively sanction misstatements in a registration statement or prospectus related to particular portfolio companies so long as the net effect on the revenues of a public private equity firm like Blackstone was immaterial.”
Finding that the shareholders “plausibly allege” omissions and “material misstatements” on the part of Blackstone, the 2nd Circuit vacated the lower court’s ruling and remanded the case for further proceedings.