Dismissal of Blackstone IPO Suit Provides a Lesson on Disclosure Issues

9/24/2009

By Susan Beck
The American Lawyer

The topic du jour in the corporate world is securities disclosure, what with the Bank of America controversy making headlines nearly every day.

The law isn't always crystal clear on just what a company needs to disclose, and how. Today we point you to a recent court opinion that gives some guidance on disclosure issues that were raised by shareholders of The Blackstone Group L.P., after its $4.5 billion IPO in 2007. The ruling, issued Tuesday, was a resounding win for Blackstone and its lawyers at Simpson Thacher & Bartlett, with the court dismissing the complaint with prejudice. We're willing to bet that everyone involved in BofA's disclosure troubles will read this closely.

Plaintiff Landman Partners Inc. had brought a putative class action in April 2008 alleging that Blackstone failed to disclose at the time of its IPO that certain of its portfolio companies were not performing well, and that Blackstone misrepresented the condition of the real estate market in general.

In his ruling, Manhattan Federal District Court Judge Harold Baer Jr. held that any omissions or misstatements were not material, and did not violate the Securities Act of 1933. The judge noted that there is no bright-line test for material omissions. Still, the court noted that the 2nd Circuit has stated that a good starting point for this analysis is whether a misstatement caused a financial error of less than 5 percent. Applying that test, the court noted that FGIC, one of the poorly performing portfolio companies at issue, represented only 0.4 percent of Blackstone's assets under management at the time of the IPO. Freescale Semiconductor, another portfolio company, represented just 3.6 percent of the assets under management.

The court stressed that this sort of numbers-based analysis is not the deciding factor, and a court must also look at "qualitative considerations that are intended to allow for a finding of materiality if the quantitative size of the misstatement is small, but the effect of the misstatement is large." But in this case those factors weren't present.

The plaintiffs also challenged Blackstone's statements about its real estate assets, stressing that the IPO prospectus stated that "[t]he real estate industry is ... experiencing historically high levels of growth and liquidity," when it fact it was "in the midst of a prolonged decline." But Judge Baer ruled that the plaintiffs allegations on this point were too vague, and furthermore, investors had enough information from other sources about the real estate market. "The omission of generally known macro-economic conditions is not material because such matters are already part of the 'total mix' of information available to investors." (If you're following BofA, you'll know that this "total mix" argument is one of BofA's main defenses. The bank asserts that the Merrill Lynch bonus information was generally known in the business community because of various press reports about compensation, and was part of the "total mix" available to BofA's shareholders.)

The Simpson Thacher team included Bruce Angiolillo, Jonathan Youngwood, Paul Sirkis, Alex Simkin and Daniel Stujenske.

According to court records, the plaintiffs were represented by Coughlin Stoia Geller Rudman & Robbins and Brower Piven. We contacted the firms for comment, but did not hear back.

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