UPDATE 2-Carlyle hit with suit over collapsed mortgage fund

* Carlyle Capital’s collapse led to $1 billion of losses

* Lawsuit charges Carlyle was negligent

* Suit says Carlyle should have moved quicker to save fund

By Matthew Goldstein

NEW YORK, July 7 (BestGrowthStock) – Carlyle Group is being sued by
the liquidators of a failed mortgage-securities fund that was
set up by the private equity group, a spokesman for the
liquidators said.

The lawsuit, which is being filed in the United States and
Europe, alleges that Carlyle Group and the former directors of
the mortgage-securities fund, Carlyle Capital Corp, breached
their fiduciary duty to investors in the more than $1 billion
fund, which collapsed in 2008.

The fund, set up in 2006, was publicly traded in Europe
beginning in July 2007.

A copy of the complaint alleges that in the “short space of
eight months the entirety of CCC’s capital was spectacularly
lost under the reckless and grossly negligent direction,
supervision, management and advice of the defendants.”

At its peak, Carlyle Capital, based in Guernsey in the
Channel Islands, managed $21 billion of mostly residential
mortgage securities.

In 2007, the fund generated about $20 million in fees for
the private equity firm, according to the liquidators with the
restructuring firm Begbies Traynor.

When Carlyle Capital collapsed in March 2008, it had more
than $16 billion of debt — mostly loans extended by banks.

“This suit is without merit. We will vigorously contest
all claims and are confident we will prevail,” said Carlyle
Group spokesman Christopher Ullman.

This is the second time Washington, D.C.-based Carlyle has
been sued over the collapse of the mortgage investment fund.

A year ago, former California Republican congressman
Michael Huffington sued Carlyle, claiming he lost his entire
$20 million investment in Carlyle Capital. Huffington is the
former husband of HuffingtonPost founder Arianna Huffington.

The lawsuit by the liquidators alleges Carlyle Capital was
overly leveraged and and relied on too much short-term
borrowing to invest in mortgage-backed securities at a time the
U.S. housing market was beginning to crumble.

The liquidators contend Carlyle, in the second half of
2007, delayed taking the necessary steps to raise capital for
the fund and sell off some of its mortgage-related assets.

Carlyle Capital was not the private equity firm’s only bad
experience with residential real estate. A $900 million hedge
fund set up by Carlyle called Blue Wave also closed in 2008
after sustaining heavy losses on investments in
mortgage-related securities.

Reuters reported in June that Blue Wave was investor in a
collateralized debt obligation called Timberwolf that was
underwritten by Goldman Sachs Group. The Timberwolf CDO, which
was the focus of a recent congressional hearing, lost 80
percent of its value five-months after Goldman began selling it
to investors in the spring of 2007.

The Carlyle Capital lawsuit, which names the investment
management arm of Carlyle Group as a defendant, is being filed
in Guernsey and in federal courts in New York, Delaware and
Washington, D.C.
(Reported by Matthew Goldstein; Editing by Maureen Bavdek and
Steve Orlofsky)

UPDATE 2-Carlyle hit with suit over collapsed mortgage fund