Litwin v. The Blackstone Group, L.P.

Facts

D is 'a leading global alternative asset manager with total assets under management of approximately $88.4 billion. D is divided into four business segments: (1) Corporate Private Equity, (2) Real Estate, Marketable Alternative Asset Management, and (4) Financial Advisory. In preparation for its 2007 IPO, D reorganized its corporate structure. Just prior to the launch of the IPO, D was formed as a Delaware limited partnership and eventually became the sole general partner of five newly formed holding partnerships into which the majority of the operating predecessor entities were contributed. When investments perform poorly, D may be subject to a 'claw-back' of already paid performance fees. The Registration Statement finally became effective on June 21, 2007. At this time, 153 million common units of D were sold to the public, raising more than $4.5 billion. In 2003, D purchased an 88% interest in FGIC. Corp. ('FGIC'), a monoline financial guarantor, from General Electric Co. for $1.86 billion. FGIC primarily provides insurance for bonds. In the years leading up to D's IPO, it began writing 'insurance' on collateralized debt obligations (CDOs). Many of the CDOs were backed by sub-prime mortgages to higher-risk borrowers. FGIC also began writing 'insurance' on residential mortgage-backed securities (RMBS) linked to non-prime and sub-prime mortgages. This 'insurance' was in the form of credit default swaps (CDSs). This effort was such a resounding success that FGIC was exposed to billions of dollars in non-prime mortgages, with its total CDS exposure close to $13 billion. Because of the massive and unbelievable fraud perpetrated in the housing market beginning in 2005, there was a significant increase in mortgage-default rates, particularly for sub-prime mortgage loans. Some of the top mortgage lenders with sub-prime mortgage exposure began revealing large losses and warned of future market losses. Without doubt the same problems plagued FGIC. In many instances, FGIC's CDS-counterparties were able to demand accelerated payments from FGIC even before a default event occurred on the underlying referenced assets. D's 23% equity interest in FGIC was worth approximately $331 million at the time of the IPO (0.4% of total assets). But guess what was not included nor listed in the IPO information.... FGIC. Following the IPO, D announced its full-year and fourth-quarter 2007 earnings with revenues down 18% from 2006 revenues. D reduced the value of its portfolio investment in FGIC, which accounted for $122.2 million, or 69%, of the decline in revenues for the year. Its Corporate Private Equity fourth-quarter revenues of ($15.4) million were negative, as compared with revenues of $533.8 million for the fourth quarter of 2006. Ps sued D. D filed a motion to dismiss the complaint and the Court granted the motion, with prejudice. The District Court's opinion primarily focused on the materiality of the alleged omissions. It noted that 'D's $331 million investment in FGIC represented a mere 0.4% of Blackstone's [total] assets under management at the time of the IPO.' It found that while the decline in FGIC's investment value may have been significant relative to the Corporate Private Equity segment's annual revenues, it was quantitatively immaterial as compared with Blackstone's $3.12 billion in total revenues for 2007. The court found that: (1) none of the omissions concealed unlawful transactions or conduct; (2) the alleged omissions did not relate to a significant aspect of D's operations; (3) there was no significant market reaction to the public disclosure of the alleged omissions; (4) the alleged omissions did not hide a failure to meet analysts' expectations; (5) the alleged omissions did not change a loss into income or vice versa; and (6) the alleged omissions did not affect D's compliance with loan covenants or other contractual requirements. Ps appealed. 

Issues

Rule of Law

Holding and Decision

Legal Analysis

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