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Landmen Partners Inc. v. Blackstone Group

September 22, 2009

LANDMEN PARTNERS INC., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFF,
v.
THE BLACKSTONE GROUP, L.P., ET AL. DEFENDANTS.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge

OPINION & ORDER

Plaintiff Landman Partners Inc. ("Plaintiff") brings this putative securities class action on behalf of all purchasers of common "units" (i.e. limited partnership interests) in The Blackstone Group L.P. ("Blackstone" or the "Company"), pursuant or traceable to Blackstone's June 25, 2007 initial public offering (the "IPO" or the "Offering"). Consolidated Amended Class Action Complaint ("CAC") ¶¶ 2, 20. Plaintiff alleges that in connection with the IPO, Blackstone and certain of its executives (collectively, "Defendants") caused the Registration Statement and Prospectus issued in connection with the IPO (collectively, the "Offering Documents") to contain materially false and/or misleading statements in violation of Sections 11 and 12(a) of the Securities Act of 1933 (the "Act"), 15 U.S.C. §§ 77k and 77l. Defendants move to dismiss the CAC for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). For the reasons that follow, Defendants' motion is GRANTED.

I. FACTUAL BACKGROUND

A. Blackstone's Business

Blackstone is a self-described "leading global alternative asset manager and provider of financial advisory services"; at root, the Company's business is toprofitably invest other peoples' money. CAC ¶2. As of May 1, 2007, Blackstone had $88.4 billion "under management" in a variety of hedge funds, corporate private equity funds, funds of hedge funds, mezzanine funds, closed-end mutual funds.*fn1 CAC ¶ 27; Decl. of Jonathon K. Youngwood, dated December 4, 2008 ("Youngwood Decl."), Ex. A ("Reg. Stmt.") at 2. These various funds are generally structured as limited partnerships that are capitalized by limited-partner investors (such as institutional investors and pension funds) and managed by Blackstone, which, through subsidiary holding partnerships, serves as general partner.

Blackstone thus does not own directly either the various portfolio companies in which its corporate private equity funds invest or the real estate assets owned by its real estate funds.*fn2

Rather, Blackstone derives revenue from two principal sources: (1) it earns a "management fee" equal to 1.5% of the value of the assets under management; and (2) it earns a "performance fee" or "carried interest" equal to of 20% of the profits generated on the capital it invests for limited partners. CAC ¶33. Blackstone is subject, however, to having its performance fees "clawed-back." That is, the Company is obligated to return performance fees to investors if investments perform poorly. CAC ¶33. In contrast to those who invest in Blackstone's various funds, investors in Blackstone itself acquire a stake in Blackstone's investment management business, hoping that strong performance by the various investment funds will generate performance fees for the Company.

B. The IPO

On March 22, 2007, Blackstone filed with the SEC a Form S-1 Registration Statement ("Registration Statement") for the IPO, and thereafter filed certain amendments thereto. CAC ¶34. On June 21, 2007, the Prospectus became effective and 153 million of Blackstone's common units were sold to the public at $31 per unit, thereby raising more than $4.5 billion, much of which was used to purchase the ownership interests from Blackstone's then-existing owners (i.e. senior management including the individual named defendants). CAC ¶36; Registration Statement at 20-21. As of the date the initial complaint was filed in this action, on April 15, 2008, Blackstone common units traded between $17.00 and $17.50 per unit. Class Action Complaint ¶ 33. By the time the Consolidated Amended Complaint ("CAC") was filed on October 27, 2008, the units traded for approximately $7.75 per unit. CAC ¶ 8.

C. Alleged Misrepresentations and Omissions

The gravamen of Plaintiff's CAC is that the Registration Statement "misrepresented and failed to disclose that certain of the Company's portfolio companies were not performing well and were of declining value," such that there was a "real, palpable and almost certain risk that the Company would be subject to a claw-back of performance fees and reduced performance fees." CAC ¶¶ 7, 40. More specifically, the CAC alleges that had the Registration Statement not been negligently prepared, it would have disclosed adverse facts about the following three Blackstone investments.

1. FGIC

FGICis in the business of insuring bonds issued by other entities; it is a monoline financial guarantor. CAC ¶41. According to the CAC, Blackstone "owns" a 23% equity stake in FGIC.*fn3 According to the CAC, between 2003 and 2007 FGIC moved away from its traditional and generally more conservative business of insuring municipal bonds towards the much riskier business of insuring collateralized debt obligations ("CDOs"), including CDO's backed by subprime mortgages and "synthetic" CDOs backed by credit default swaps, a form of insurance policy designed to protect the holder of a CDO against default. CAC ¶¶ 43-55. According to the CAC, as a consequence of its investment in FGIC, Blackstone had substantial exposure to the subprime mortgage market, which, as of the time of the IPO in March 2007, was clearly and demonstrably on the verge of collapse. CAC¶¶ 62-75. Plaintiff alleges that as a major investor in FGIC, Blackstone had a duty to disclose in the Offering Documents such "then-known trends, events, or uncertainties associated with FGIC" because they were "reasonably likely to cause ...


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