BOSTON (CN) – Michael Huffington says the Carlyle Group took him for $20 million after former President George H.W. Bush personally introduced him to one of its founders. Huffington says the former president introduced him to defendant David Rubenstein at a July 4 dinner in Bush’s honor in Iceland in 2006.
Carlyle Capital Corp. was a publicly traded mortgage-securities fund that collapsed last spring.
Huffington, heir to an oil fortune and the ex-husband of political gadfly Arianna Huffington, sued Rubenstein and the Carlyle Group in Suffolk County Court. Michael Huffington is also a former one-term Republican congressman from California and ran unsuccessfully for U.S. Senate.
He claims that Rubenstein and others at Carlyle promised that their fund would maintain a low leverage ratio and would be a “conservative” investment.
After expressing his disinterest in private equity during the presidential dinner, Huffington says, he told Rubinstein he was interested in low-risk investments. He says Rubenstein came to Huffington’s Boston home in October 2006 to discuss an investment.
During that meeting, Huffington says, Rubenstein told him about the group’s newly formed fund, Carlyle Capital, a close-end investment fund which sought to achieve risk-adjusted returns primarily through current income and capital appreciation. According to Huffington’s complaint, “the Fund planned to invest primarily in eight fixed income classes including residential mortgage-backed securities principally in high investment grade-rated risk classes.”
The primary assets held by the Fund were said to be Residential Mortgage-Backed Securities issued by Fannie Mae and Freddie Mac.
At the meeting, Huffington says, Rubenstein showed him a PowerPoint presentation that stated the group’s intentions to avoid “competitive bidding, overleverage and double digit pricing multiples.”
Huffington says he was not told that the fund would be leveraged – that is, would try to reap greater returns by using borrowed money – until a meeting in New York on Jan. 26, 2007. He says he was told that “they had ‘run the metrics’ and that he should not be concerned about leverage.”
Despite multiple conversations with the head of Carlyle Capital, John Stomber, Huffington says, the dramatic levels of leverage were never disclosed and he was never informed the assets could be leveraged by as much as 32 to 1.
Rubenstein told the Wall Street Journal in March 2008 that “in hindsight the leverage was excessive.”
Huffington claims Stomber made additional misrepresentations, which increased his losses, after Huffington invested in the fund on Feb. 28, 2007.
In an email on March 15, 2007 Stomber tried to reassure investors in the face of increasing press coverage of subprime mortgages. Stomber said that the Fund “does not have any Residential Mortgage Backed Securities (or any Mortgage Backed Securities or Whole Loans) in its portfolio that has exposure to sub-prime based collateral,” according to the complaint.
Stomber allegedly added that the Fund held “U.S. Government Agency (i.e. Fannie Mae and Freddie Mac) Residential Mortgage Backed Securities that are AAA rated and are guaranteed by either Fannie Mae or Freddie Mac, which are AAA rated companies that carry an implied guarantee of the US Government.”
On March 5, 2008 Carlyle Capital issued a press release indicating that since it had filed its Annual Report, it had been subjected to more than $60 million in margin calls and additional collateral requirements from its Repo counterparties.
Huffington says that two weeks before his equity was gone, Stomberg told investors, “During the fourth quarter our portfolio stabilized and we were able to generate returns consistent with our near term targets,” and that, “We continue to run our business to preserve the value of our shareholders’ equity.”
Carlyle was unable to meet the growing number of margin calls and the Repo counterparties foreclosed on the collateral. Huffington says Rubenstein called him on March 14 to tell him that the Fund was going under but that Huffington would not lose money even if the Fund did not survive; he says Rubenstein asked him not to sell any of his shares.
Huffington says he did not sell but he did lose his money.
Between July 2007 and March 2008 the share price dropped from $19 to 35 cents.
Huffington says Rubenstein came to Boston on May 15, 2008 and apologized for the losses. He says Rubenstein assured him he would get his money back with interest after Carlyle persuaded other investors to invest more money in other deals without being charged fees.
Huffington says his investment of $20 million was “more than he had ever invested in a single fund, other than a money market type of fund.”
Huffington demands treble damages. He is represented by Philip Curcio with Adler Pollock & Sheehan.