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Sunday, July 11, 2010

Powerful Private Equity Firm Sued Over 'Reckless' Mortgage Fund

How soon they forget, only took 18 months
The world's second-biggest private-equity firm was sued this week over its "reckless and grossly negligent" management of a failed mortgage bond affiliate that cost investors nearly $1 billion, according to suits filed in Delaware and New York.
The Carlyle Group, which oversees more than $90 billion across six continents, stands accused of paying its executives "excessive and unjustified" fees while managing its hedge fund, Carlyle Capital Corporation, into the ground, the Financial Times and Bloomberg News report, citing the two lawsuits. CCC, which invested in mortgage-backed securities and "leveraged finance assets," collapsed in March 2008 after it "failed to meet more than $400 million of margin calls on mortgage-backed collateral," Bloomberg reports.
By the end of 2007 the fund had $21 billion in debt but just $75 million to meet margin calls, the FT reports, citing the lawsuit.
Investors in the fund allege that Carlyle Group officials took more than $20 million in fees and more than $50 million in other benefits, the FT reports, citing the lawsuit, despite that within a year the failed hedge fund had unrealized losses exceeding $270 million.
"In the short space of eight months, the entirety of CCC's capital was spectacularly lost under the reckless and grossly negligent direction, supervision, management and advice of the defendants," Bloomberg reports, citing the lawsuit. The Carlyle Group "preferred" its own "corporate interests" over that of the hedge fund, the lawsuit alleges, according to the FT.
The $945 million hedge fund sought annual returns of at least 12 percent, according to the Delaware-filed suit, Bloomberg reports. While the fund called for leverage of about 19 times capital, the actual leverage exceeded 30 times capital, Bloomberg reports, citing the lawsuit.
"CCC's losses were the direct result of a determinedly reckless 'bet the farm' approach, brazenly pursued in the self-interests of the Carlyle Group," Bloomberg reports, citing the lawsuit.
Bank of America Corp., the largest U.S. bank by assets, said it wrongly classified as much as $10.7 billion of short-term repurchase and lending transactions as sales from 2007 to 2009 to reduce its end-of-quarter assets.
Bank of America said the inaccuracies aren’t material and “don’t stem from any intentional misstatement of the Corporation’s financial statements and was not related to any fraud or deliberate error,” according to a May 13 letter released yesterday from the U.S. Securities and Exchange Commission.
“A $10.7 billion accounting error would be a material event for about 99.9 percent” of U.S. banks, said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University School of Law. “It’s hard to see how the SEC can accept BofA’s rejoinder as being sufficient.”
SEC spokesman John Nester declined to comment.
The SEC sent letters to finance chiefs at about two dozen firms in March asking whether they employed accounting strategies like those at Lehman Brothers Holdings Inc. The bankrupt securities firm was accused of using repurchase agreements called Repo 105s to move assets off its balance sheet to hide leverage, thereby improving its capital ratios.
$2.3 Trillion
Bank of America had disclosed in a March 31 financial filing that “certain sales of agency mortgage-backed securities should have been recorded as secured borrowings rather than sales,” bank spokesman Jerry Dubrowski said. “The handful of transactions did not have a material impact on the company’s balance sheet or earnings. They need to be viewed in the context of our $2.3 trillion balance sheet.”
In April, the SEC asked Bank of America to disclose whether its transactions were intentionally mislabeled, and to prove that the trades were immaterial. The Charlotte, North Carolina- based bank said in an April 13 letter that it stopped the transactions after the first quarter of 2009, the SEC said.
The Bank of America transactions involved six so-called dollar-roll trades completed during 2007, 2008 and 2009. The amount of the trades represented 0.1 percent of total assets in the December 2008 quarter and improved the company’s Tier 1 capital leverage ratio by one basis point, or one-hundredth of a percentage point, during the September 2008 quarter, the bank said. LinkHere


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