Blackstone Group lost its bid to have an IPO investor lawsuit thrown out after the Supreme Court on Monday declined to review a federal appellate court ruling that let investors pursue their action to recover losses from the 2007 offering.
Thousands of investors who bought 133 million units of Blackstone’s IPO for a total of$3.5 billion are seeking to recover money lost when the shares declined in value, according to David A. Brower, attorney at the law firm of Brower Piven and lead counsel for the plaintiffs.
Blackstone’s petition to stop the case was supported by the Securities Industry and Financial Markets Association and the U.S. Chamber of Congress over concern that such suits would increase exposure to unfounded class actions by easing the rule of materiality, which requires plaintiffs to show that errors affected a significant portion of the company’s business.
The appellate court ruling “eliminates one of the very few tests by which a court can act as gatekeeper … dismissing cases that are meritless but may nonetheless have high settlement value,” according to SIFMA’s amicus brief.
The case now goes back to U.S. District Court in New York, which in September 2009 initially denied the class-action suit.
The investor lawsuit alleged that Blackstone officials were aware of problems with two companies in which it held stakes and misrepresented prospects for some real estate investments, but the district court ruled that because those issues made up less the 5% of Blackstone’s business, it was immaterial. On Feb. 2, the appeals court ruled that the 5% rule could be applied to a segment, rather than the entire company, and allowed the case to proceed.
“Blackstone doesn’t get to decide what the sole and exclusive metric is,” Mr. Brower said in an interview. “Assets under management are perhaps the most irrelevant, especially in an IPO, because that’s only past successes. Investors would want to know that you’re no longer infallible. That’s why the investor really needs to know what’s going on with the investments.”
Given the appeals court’s New York jurisdiction, that decision “threatens to have an outsized impact on the disclosure process and the scope of liability,” SIFMA wrote in its Supreme Court amicus brief.
Once the case gets back to the district court, “the judge will have a lot more information,” said Henry P. Monaghan, a Columbia law school professor who helped Blackstone prepare its Supreme Court petition. “The basic issue is, were there misrepresentations when the IPO was issued, and what is the relevance?” Mr. Monaghan said in an interview.
The suit, Landmen Partners vs. Blackstone Group, also names Blackstone executives Stephen Schwarzman, Michael Puglisi, Peter Peterson and Hamilton James as defendants. Calls to Blackstone and the law firm representing them in the case, Simpson Thacher & Bartlett, were not returned at press time.