Supreme Court Allows Investor Claim Against Blackstone to Proceed

October 3, 2011

A lawsuit against Blackstone Group LP , alleging the private equity firm failed to disclose problem investments before its 2007 initial public offering, will go ahead after the U.S. Supreme Court rejected the company’s appeal.

The justices on Monday refused to review whether a U.S. appeals court in New York used the wrong legal standard when it ruled that the lawsuit by investors could go forward. A federal judge initially dismissed the lawsuit.

The lawsuit alleges that New York-based Blackstone failed to properly disclose a $331 million investment in FGIC, a bond insurer hurt by subprime mortgages; a $3.1 billion investment in Freescale Semiconductor Inc, which would lose a key contract; and some commercial real estate investments.

The lawsuit seeks to hold Blackstone, co-founder and Chief Executive Stephen Schwarzman, co-founder Pete Peterson and others responsible for investor losses.

The company has denied the allegations and says it made proper disclosures under the law.

Blackstone, one of the world’s largest and best known private equity firms, offered 153 million common units at $31 each when it went public in June 2007, raising $4.7 billion. It had $88.4 billion under management at the time.

Blackstone said the appeals court disregarded a long-standing rule of thumb that omissions affecting less than 5 percent of the assets under management are likely to be immaterial to a firm’s business as a whole.

Bruce Angiolillo, an attorney for Blackstone, said the appeals court ruling would require companies, as part of an IPO, to “flood investors with unnecessary and confusing detail.”

The plaintiffs said the appeals court ruling was correct and that there were no important policy concerns that merited Supreme Court review.

David Brower, an attorney for the investors, said Blackstone wanted “to alter corporate disclosure obligations by turning the clock back to pre-1933 days and return investors in public companies to an environment” of let the buyer beware.

The Supreme Court rejected the appeal without comment.

The Supreme Court case is Blackstone Group v. Litwin, No. 11-15.

(Reporting by James Vicini in Washington, Editing by John Wallace)

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