Burned Carlyle investor backs suit against private equity firm

Louis Reijtenbagh, a 70-year-old former family doctor who became one of the Netherlands’ richest men by investing in art, distressed debt and other assets, has already put an estimated tens of millions of dollars behind the case, according to people familiar with the matter. Meanwhile, Carlyle is suing him in Delaware for providing the funding for the litigation.

The situation recalls tech billionaire Peter Thiel‘s backing of a successful suit this year by wrestler Hulk Hogan against Gawker Media, bankrupting the media company that had outed Thiel as gay in a 2007 blog. It is also just one of several lawsuits Reijtenbagh has funded in recent years, including in Australia where he stands to make more than $ 400 million from a $ 1.25 billion settlement between a failed conglomerate, Bell Group, and its banks.

Litigation funding – or the practice of paying for lawsuits in exchange for a share of any settlement or award – has become an asset class in its own right, with pension funds, investment managers and family offices investing in it. But it typically involves groups of investors spreading their capital across portfolios of lawsuits rather than a single individual funding the action. Returns can be high but critics say litigation funding can lead to overzealous legal action, or to billionaires trying to silence their enemies or tie them up in costly court proceedings for years. Proponents of litigation funding say it helps cash-strapped plaintiffs get cases off the ground.

Reijtenbagh declined to comment for this article.

The Carlyle case, in a court on the English Channel island of Guernsey, hinges on whether Carlyle Group and several of its executives met their duties to a short-lived mortgage-bond fund called Carlyle Capital Corp. CCC failed in March 2008 when banks pulled the short-term loans it needed to buy mortgages.

Court-appointed liquidators in Guernsey, where CCC was incorporated a decade ago, are seeking more than $ 1 billion in compensation and damages. Carlyle Group and the executives deny any wrongdoing and say they always met their fiduciary obligations to CCC investors. A six-month trial is due to end this week and a judge is expected to decide on the case early next year.

Any award would go to Reijtenbagh as the funder of the lawsuit and to the Wall Street banks that lost money when they stopped lending to CCC and sold bonds that were posted as collateral at a loss, according to legal filings and people familiar with the matter. If the liquidators lose the suit, they could be on the hook for Carlyle’s legal fees.

Reijtenbagh also faces a lawsuit in Delaware filed by Carlyle, which alleges his funding of the liquidators breaks earlier agreements made between Carlyle and investment companies of Reijtenbagh. He denies any agreements with Carlyle have been broken and is fighting the lawsuit.

The dispute traces back to 2006, when Reijtenbagh invested in CCC alongside wealthy Middle Eastern families and Angola’s central bank, according to filings in the Guernsey case. After an early career as a family doctor in the Netherlands, Reijtenbagh turned to full-time investing in 1990, building a $ 1 billion portfolio of fund stakes, art and real estate by the mid-2000s, according to regulatory and legal filings.

CCC aimed to make around 12% a year by using borrowed money to amp up returns on seemingly ultra-safe mortgage bonds. Then the financial crisis hit, putting CCC out of business. CCC’s investors lost everything and are unlikely to get a share of any potential award in the Guernsey court.

To raise cash in 2009, Reijtenbagh started selling stakes he held in other Carlyle private equity funds. As part of that process, investment companies of Reijtenbagh’s allegedly gave up rights over future legal claims, according to filings by Carlyle in the Delaware case.

Reijtenbagh denied providing funding for the liquidators’ lawsuit, according to a filing in the Delaware case, then acknowledged in a filing this year that he is providing funding to CCC and CCC liquidators, “in return for valuable consideration.” That case is ongoing.

Write to Margot Patrick at margot.patrick@wsj.com

This article was published by The Wall Street Journal

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