Kuwaiti Firm Pursues Fraud Action against Carlyle; Carlyle Lacked License to Sell Failed Securities, Says NIG

26 Aug, 2012, 06:10 ET from National Industries Group

KUWAIT CITY, Aug. 26, 2012 /PRNewswire/ -- National Industries Group (NIG), a prominent Kuwaiti holding company, is seeking clearance from a United States court to pursue a Kuwaiti lawsuit alleging fraud and deceit against units of the U.S. private-equity giant Carlyle Group. The lawsuit stems from Carlyle's sale of shares in a supposedly safe fixed-income fund that collapsed in 2008, wiping out NIG's $25-million investment.

Not only did Carlyle salespeople repeatedly misrepresent the safety of the underlying investments and the conservative parameters for managing the fund, according to NIG, but they failed to disclose that Carlyle, which bills itself as a Middle East expert, lacked the necessary license to even legally offer the investments in Kuwait.

NIG cited the allegations in an Aug. 13 motion with the Delaware (U.S.) Court of Chancery, where the company seeks an order acknowledging that jurisdiction belongs with the Kuwaiti courts.

Under Kuwaiti law, selling securities without a license nullifies a transaction, meaning that NIG should be entitled to rescission of its entire $25-million investment. Facing such rescission, Carlyle has fought to avoid Kuwaiti jurisdiction.

"Carlyle was more than happy to conduct its sales presentations in Kuwait and close its deals in Kuwait," said Ahmed Hassan, General Manager of NIG. "But now that the moment has come to deal with the ugly aftermath and the firm's attempts to mislead and deceive its own investors, Carlyle would prefer to try its luck in Delaware."

The case may have ramifications throughout the Middle East, which was one of Carlyle's main targets in 2006 when it was rolling out its international sales pitch for private investments in the fixed income fund, Carlyle Capital Corporation Ltd., or CCC.

Carlyle co-founder and director David M. Rubenstein has his own credibility on the line. Mr. Rubenstein personally marketed the CCC fund to Middle East investors and, after it failed, personally offered NIG representatives the opportunity to invest in other Carlyle deals as a means to recoup their losses.

Carlyle raised $600 million in private investments – much of it in the Middle East – before offering the fund to the public and raising another $340 million. It is uncertain how many of the sales would be subject to rescission if Carlyle was also unlicensed in other Middle Eastern countries besides Kuwait.

CCC leveraged its clients' money to an extraordinary 32-to-1 debt-to-equity ratio and collapsed in March 2008 when banks refused to issue it any more credit after its underlying portfolio of mortgage securities declined in value during the U.S. housing plunge.

The collapse exposed the falsity of both main elements of the Carlyle sales pitch:

  • That the underlying investments would be safe. Rather than perform its own due diligence, Carlyle appears to have blindly followed the suspect analysis of ratings agencies, which gave premium ratings to the bulk of the securities.
  • That the fund would be managed conservatively, with 20% liquidity cushion set aside as a buffer against "margin calls" if the underlying portfolio declined in value. In fact, the liquidity cushion was not maintained, and this lack of liquidity was the main cause of the fund's shocking collapse.

SOURCE National Industries Group