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Judy Greenwald

Judge dismisses investment group lawsuit, says investors knew of risks

August 15, 2012

Investment Fraud


A federal judge has dismissed a purported class action lawsuit brought by investors that claimed an investment group had engaged in fraud, stating they had been well warned of the risks involved.

Investors had bought shares offered by Guernsey-based Carlyle Capital Corp. Ltd., whose sole business was buying residential mortgage-backed securities on margin, according to Monday's opinion in E.L. Phelps et al. v. John Crumpton Stomber. CCC has been in liquidation since 2008, according to the ruling. Mr. Stomber was CCC's president, CEO and chief investment officer.A total of $600 million was raised through private placements in late 2006 and early 2007, according to the ruling.

The shares “were made available only to a restricted group of sophisticated wealth investors; the shares were marketed with ominous warnings…and the very risks that were disclosed materialized when conditions in the real estate market and global economy deteriorated in 2008,” said the ruling by Judge Amy Berman Jackson of the U.S. District Court for the District of Columbia.

No fraud proven

Judge Jackson said the focus of the plaintiffs' complaint was that while the offering memorandum “disclosed that liquidity issues that would threaten the company could occur, it omitted information that would have alerted investors to the fact that those events were already occurring.”

However, said the judge, the plaintiffs had failed “to state a claim up on which relief can be granted.”

The ruling said: “Essentially, this complaint is an attack on how CCC was managed, and ultimately, it questions the wisdom behind the adoption of its business model in the first place. But chiding CCC with the benefit of hindsight for its failure to resist the stampede to purchase mortgage-backed securities is not the same thing as alleging fraud, particularly given the stringent standards of the” Private Securities Litigation Reform Act of 1995. The action “lacks the defining element of fraud: a falsehood,” said the judge in dismissing the complaint.

 



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