SEC blocks attempt by Carlyle Group to include arbitration provision in stock offering

February 17, 2012 by

Carlyle Group LP abandoned a plan to ban shareholders from filing class action lawsuits after U.S. regulators threatened to block a stock sale the private equity firm is seeking to complete as soon as April.

The Washington-based firm amended the documents for its Initial Public Offering on January 10, to include a provision that would have required future stockholders to resolve any claim against Carlyle through arbitration rather than in court.   The move provoked controversy among lawmakers and shareholder rights advocates, who urged the U.S. Securities and Exchange Commission not to approve the arbitration clause.

The SEC subsequently told Carlyle that it wouldn’t sign off on the IPO as long as the provision was included, according to a statement the agency issued on February 3rd.  In addition, the proposal was likely to draw opposition from public pensions and agencies, which provided about 40 percent of the capital commitments to Carlyle’s funds as of September 30, 2011 and would also have been potential customers for the IPO.

The American Association for Justice, the primary trade group for trial lawyers, urged its members to contact public pension funds and ask them to weigh in with Carlyle and the SEC, according to Michelle Widmann, a spokeswoman for the Washington-based association.  The Council of Institutional Investors, an association of pension funds, endowments, and foundations that oversee more than $3 trillion in assets, had also placed the Carlyle proposal on its policy committee agenda for review, according to Jeff Mahoney, the organization’s general counsel.

The underwriters Carlyle picked up for the IPO, including JPMorgan Chase & Co., Citigroup Inc. and Credit Suisse Group AG, are planning a roadshow early in the second quarter to market the shares to investors, according to a person with direct knowledge of the plans, who asked not to be identified because the information isn’t public.  The roadshow is one of the final steps before a company goes public.

Carlyle’s initiative followed a series of U.S. Supreme Court (1000L) rulings that said arbitration was the preferred method of resolving disputes between corporations and their customers and employees.  That concept could have been extended to U.S.  securities markets had Carlyle succeeded in going public with a mandatory-arbitration clause.

Democratic Senators Richard Blumenthal of Connecticut, Al Franken of Minnesota and Robert Menendez of New Jersey on February 3rd urged the SEC Chairman Mary Shapiro not to clear the IPO unless Carlyle drops the arbitration clause.  Ms. Shapiro also served as one of the agency’s five commissioners in the late 1980s, when the SEC blocked the Franklin First IPO.

The provision “would unlawfully deprive investors of their ability to vindicate their statutory rights,” the senators wrote.  The SEC should “maintain its longstanding policy of opposing the inclusion of provisions requiring mandatory arbitration of shareholder disputes.”

Former SEC Chairman Harvey Pitt said the issue probably faced a 3-2 ideological split on the current commission, which includes two Republicans, two Democrats and a politically independent chairman who usually votes with the Democrats.  If it had come to a different commission, the odds may have been better, he said in an interview on February 2nd.

“If somebody tells you that you’re going to have a very different set of remedies if you make this investment, and you still want to invest, it seems to me government has done its job,” said Mr. Pitt, a Republican.  “It would have passed on my commission.”

Carlyle, co-founded by David Rubenstein, William Conway and Daniel D’Aniello, would be at least the fifth buyout firm to go public since Fortress Investment Group  LLC (FIG) held an IPO in February 2007, followed by Blackstone Group LP (BX), KRR & Co. and Apollo Global Management LLC (APOLLZ).  Carlyle would have been the first to impose an arbitration requirement, according to the copies of the limited-partnership agreements the companies have on their websites or in SEC filings.

Blackstone was named in six 2008 lawsuits that were later consolidated into a class action complaint alleging that the prospectus for the company’s IPO was false and misleading, in part because it overstated the value of the firm’s private equity and real estate investments.

Blackstone shares trade at about 46 percent below the company’s June 2007 IPO price of $31 each.

Steve Larson
An experienced trial lawyer who handles both hourly and contingent fee cases, Steve has expertise in class actions, consumer cases, antitrust litigation, securities litigation, corporate disputes, intellectual property disputes, unfair competition claims, employment matters, and disputes involving family wealth. Steve regularly represents individuals and businesses in federal and state court and has obtained class-wide recovery in multiple class actions. A veteran practitioner, Steve's clients value his creative approach to resolving complex litigation matters.

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