Investor Sues Blackstone for Lack of Transparency

An investor in Blackstone Group sued the private equity and real estate firm Tuesday, contending it violated federal securities laws through statements made in its initial public offering documents, according to the law firm that brought the case.

Law firm Coughlin Stoia Geller Rudman & Robbins said the lawsuit, which seeks class-action status, was filed in U.S. District Court for the Southern District of New York on behalf of plaintiff Landmen Partners.

The lawsuit accuses Blackstone

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[BX  Loading...      ()   ] of failing to disclose in an IPO document that certain of its portfolio companies were not performing well and that as a result, the company would not generate anticipated performance fees on those investments, according to a copy of the complaint provided to Reuters by the law firm.

Blackstone is subject to a "claw back" provision that requires it to return performance fees that have already been paid if the investments it makes for its limited partners perform poorly, the lawsuit said.

The suit contends that at its IPO, Blackstone knew that its large investment in Financial Guaranty Insurance (FGIC), a bond insurer, was "materially impaired" after FGIC switched its focus from conservative municipal bonds to collateralized debt obligations backed by subprime mortgages.

The company's investment in Freescale Semiconductor

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[FSL  Loading...      ()   ] was also in trouble but its registration statement contained no disclosure about this or the FGIC problems, the lawsuit said.

Named as defendants are Blackstone's co-founder and chief executive, Stephen Schwarzman, and Chief Financial Officer Michael Puglisi. A Blackstone representative had no comment on the lawsuit.

Blackstone went public in June 2007 at a price of $31 a share, coming on the back of a boom for private equity that has now been stalled by the persisting credit crunch.

In the buyout boom that peaked in 2007, private equity firms broke records for the size of leveraged buyouts inked.

But as the credit markets contracted and the economy hit a downturn, some of the portfolio companies that buyout firms loaded with debt to take private have been having problems.

Home goods retailer Linens 'n Things said on Tuesday it is in talks with creditors on a capital restructuring, after a source had told Reuters on Friday that bankruptcy was among options being considered.

Apollo Global Management led a $1.3 billion of the chain in 2006.

In March, Blackstone posted a worse-than-expected 86 percent decline in earnings, partly citing a write-down of its investment in bond insurer FGIC.

The company's shares closed at $17.33 on the New York Stock Exchange on Tuesday, up 14 cents on the day.