634 F.3d 706 (2nd Cir. 2011), 09-4426-cv, Litwin v. Blackstone Group, L.P.

Docket Nº:09-4426-cv.
Citation:634 F.3d 706
Opinion Judge:STRAUB, Circuit Judge:
Party Name:Martin LITWIN, Max Poulter, Francis Brady, and Landmen Partners, Inc., Individually and on behalf of all others similarly situated, Plaintiffs-Appellants, v. The BLACKSTONE GROUP, L.P., Stephen A. Schwarzman, Michael A. Puglisi, Peter J. Peterson, and Hamilton E. James, Defendants-Appellees.[*]
Attorney:David A.P. Brower, Brower Piven, PC, New York, NY (Caitlin M. Moyna, Brower Piven, PC, and Samuel H. Rudman, David A. Rosenfeld, and Mark M. Millkey, Robbins Geller Rudman & Dowd LLP, Melville, NY, on the brief), for Plaintiffs-Appellants. Bruce D. Angiolillo, Simpson Thacher & Bartlett LLP (Jona...
Judge Panel:Before: MINER, CABRANES, and STRAUB, Circuit Judges.
Case Date:February 10, 2011
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
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Page 706

634 F.3d 706 (2nd Cir. 2011)

Martin LITWIN, Max Poulter, Francis Brady, and Landmen Partners, Inc., Individually and on behalf of all others similarly situated, Plaintiffs-Appellants,

v.

The BLACKSTONE GROUP, L.P., Stephen A. Schwarzman, Michael A. Puglisi, Peter J. Peterson, and Hamilton E. James, Defendants-Appellees. [*]

No. 09-4426-cv.

United States Court of Appeals, Second Circuit

February 10, 2011

Argued: Aug. 25, 2010.

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David A.P. Brower, Brower Piven, PC, New York, NY (Caitlin M. Moyna, Brower

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Piven, PC, and Samuel H. Rudman, David A. Rosenfeld, and Mark M. Millkey, Robbins Geller Rudman & Dowd LLP, Melville, NY, on the brief), for Plaintiffs-Appellants.

Bruce D. Angiolillo, Simpson Thacher & Bartlett LLP (Jonathan K. Youngwood, on the brief), New York, NY, for Defendants-Appellees.

Before: MINER, CABRANES, and STRAUB, Circuit Judges.

STRAUB, Circuit Judge:

Plaintiffs-Appellants appeal from a judgment of the United States District Court for the Southern District of New York (Harold Baer, Jr., Judge ), entered on September 25, 2009, dismissing plaintiffs' putative securities class action complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. See Landmen Partners Inc. v. Blackstone Group, L.P., 659 F.Supp.2d 532 (S.D.N.Y.2009). We conclude that the District Court erred in dismissing plaintiffs' complaint because plaintiffs plausibly allege that material information was omitted from, or misstated in, defendants' initial public offering registration statement and prospectus in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933. Accordingly, we vacate the District Court's judgment and remand for further proceedings.

BACKGROUND

Because this is an appeal from a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the following facts, which we assume to be true, are drawn from plaintiffs' Consolidated Amended Class Action Complaint as filed on October 27, 2008. See Slayton v. Am. Express Co., 604 F.3d 758, 766 (2d Cir.2010). Where relevant, however, we include information from Securities and Exchange Commission (" SEC" ) filings by the Blackstone Group, L.P. (" Blackstone" ) to which plaintiffs refer in their complaint, particularly the Form S-1 Registration Statement (" Registration Statement" ) and Prospectus filed by Blackstone in connection with its June 21, 2007 initial public offering (" IPO" ). See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) (" [C]ourts must consider the complaint in its entirety, as well as other sources ..., in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." ); see also ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.2007) (" [W]e may consider ... legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit." ).

Lead plaintiffs Martin Litwin, Max Poulter, and Francis Brady, appointed by the District Court on September 15, 2008, bring this putative securities class action on behalf of themselves and all others who purchased the common units of Blackstone at the time of its IPO. Plaintiffs seek remedies under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (" Securities Act" ), 15 U.S. C. §§ 77k, 77 l (a)(2), 77o, for alleged material omissions from, and misstatements in, Blackstone's Registration Statement and Prospectus.1 Defendants

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are Blackstone and Blackstone executives Stephen A. Schwarzman, Michael A. Puglisi, Peter J. Peterson, and Hamilton E. James (collectively referred to herein as " Blackstone" ).

Blackstone is " a leading global alternative asset manager and provider of financial advisory services" and " one of the largest independent alternative asset managers in the world," with total assets under management of approximately $88.4 billion as of May 1, 2007. Blackstone is divided into four business segments: (1) Corporate Private Equity, which comprises its management of corporate private equity funds; (2) Real Estate, which comprises its management of general real estate funds and internationally focused real estate funds; (3) Marketable Alternative Asset Management, which comprises its management of hedge funds, mezzanine funds, senior debt vehicles, proprietary hedge funds, and publicly traded closed-end mutual funds; and (4) Financial Advisory, which comprises a variety of advisory services. The Corporate Private Equity segment constitutes approximately 37.4% of Blackstone's total assets under management ($33.1 billion of $88.4 billion), and the Real Estate segment constitutes approximately 22.6% of Blackstone's assets under management ($20 billion of $88.4 billion). According to Blackstone, " [b]oth the corporate private equity fund and the two real estate opportunity funds (taken together) ... are among the largest funds ever raised in their respective sectors." Blackstone further represents to prospective investors that its " long-term leadership in private equity has imbued the Blackstone brand with value that enhances all of [its] different businesses and facilitates [its] ability to expand into complementary new businesses."

In preparation for its 2007 IPO, Blackstone reorganized its corporate structure. Prior to the IPO, Blackstone's business was operated through a large number of separately owned predecessor entities. On March 12, 2007, just prior to the launch of the IPO, Blackstone 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. Blackstone receives a substantial portion of its revenues from two sources: (1) a 1.5% management fee on its total assets under management and (2) performance fees of 20% of the profits generated from the capital it invests on behalf of its limited partners. Under certain circumstances, when investments perform poorly, Blackstone may be subject to a " claw-back" of already paid performance fees, in other words, the required return of fees which it had already collected.

On March 22, 2007, Blackstone filed its Form S-1 Registration Statement with the SEC for the IPO. Blackstone filed several amendments to its Registration Statement, and the Prospectus, which formed part of

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the Registration Statement, finally became effective on June 21, 2007. At this time, 153 million common units of Blackstone were sold to the public, raising more than $4.5 billion. The individual defendants and other Blackstone insiders received nearly all of the net proceeds from the IPO.

Plaintiffs principally allege that, at the time of the IPO, and unbeknownst to non-insider purchasers of Blackstone common units, two of Blackstone's portfolio companies as well as its real estate fund investments were experiencing problems. Blackstone allegedly knew of, and reasonably expected, these problems to subject it to a claw-back of performance fees and reduced performance fees, thereby materially affecting its future revenues.

FGIC Corporation

In 2003, a consortium of investors that included Blackstone purchased an 88% interest in FGIC Corp. (" FGIC" ), a monoline financial guarantor, from General Electric Co. for $1.86 billion. FGIC is the parent company of Financial Guaranty, which primarily provides insurance for bonds. Although municipal bond insurance traditionally constituted the majority of Financial Guaranty's business, in the years leading up to Blackstone's IPO it began writing " insurance" on collateralized debt obligations (" CDOs" ),2 including CDOs backed by sub-prime mortgages to higher-risk borrowers. Financial Guaranty also began writing " insurance" on residential mortgage-backed securities (" RMBSs" ) 3 linked to non-prime and sub-prime mortgages. This " insurance" on RMBSs and CDOs was in the form of credit default swaps (" CDSs" ).4

By the summer of 2007, FGIC, as a result of Financial Guaranty's underwriting practices, was exposed to billions of dollars in non-prime mortgages, with its total CDS exposure close to $13 billion. From mid-2004 through mid-2007, factors including rising interest rates, the adjustment of interest rates on sub-prime mortgages, and a substantial slowing of property-value appreciation (and in some markets, property-value depreciation) caused many borrowers to be unable to refinance their existing loans when they could not meet their payment obligations. As a result, beginning in 2005, there was a significant increase in mortgage-default rates, particularly for sub-prime mortgage loans. By early 2007, before the IPO, some of the top mortgage lenders with sub-prime mortgage exposure began revealing large losses and warned of future

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market losses. All of these symptoms, plaintiffs allege, provided a strong indication that the problems plaguing sub-prime lenders would generate substantial losses for FGIC on the CDSs it issued to its counterparties. This likelihood was allegedly exacerbated because, 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.

Blackstone's 23% equity interest in FGIC was worth approximately $331 million at the time of the IPO. Plaintiffs allege that, due to this significant interest, Blackstone was required to disclose the then-known trends, events, or uncertainties related to FGIC's business that were reasonably likely to cause Blackstone's financial information not to be indicative of future operating results. Following the IPO, in a March 10, 2008 press release, Blackstone announced its full-year and fourth-quarter 2007 earnings. The company's Corporate...

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