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Reject Carlyle Group’s Attack on Investor Rights, Groups Tell SEC

Feb. 3, 2012 

Reject Carlyle Group’s Attack on Investor Rights, Groups Tell SEC

Asset Management Firm Tries to Limit Shareholders’ Rights Through Language in IPO Registration

UPDATE: After we sent this press release, the Carlyle Group decided to remove the forced arbitration clause and class action ban from its IPO filing documents. Below is a reaction from Christine Hines, consumer and civil justice counsel with Public Citizen:

“We are pleased that the Carlyle Group decided to reverse a very bad decision by removing the proposed forced arbitration clause and class action ban from its IPO filing documents. The provisions would have denied its shareholders the right to hold the company accountable in court. According to Carlyle spokesman Christopher Ullman’s quote in Bloomberg News, Carlyle thought arbitration would be more efficient, cost-effective and beneficial to its unitholders. On the contrary, forced arbitration and bans on class action have an extensive record of stomping on consumers’ and investors’ legal rights and shielding corporations from their own wrongful conduct. Thankfully, the media coverage and outside pressure, including that of Public Citizen and other groups, were enough to encourage the company to retreat before real damage was done. Public Citizen strongly supports investor protection, and the SEC has our response on the record should another company seek to eviscerate the rights of shareholders.”


WASHINGTON, D.C. – The Securities and Exchange Commission (SEC) should reject an asset management firm’s attempt to insert forced arbitration language into its registration statement with the agency. The inserted language both limits shareholders’ rights and weakens the agency’s oversight abilities, Public Citizen and eight other groups said in a letter sent today to the SEC. Like certain other recent registrations, Carlyle’s makes other significant attacks on investor rights, the letter stated, but the forced arbitration provisions are novel and therefore are the focus of the letter.

The Carlyle Group, L.P., filed an amendment in January to its registration statement regarding its initial public offering (IPO) that would require forced arbitration of disputes between shareholders and the company. The amendment also forbids any claims that may arise from being heard in court or as part of a class action and requires that any arbitration proceeding be heard in Wilmington, Del. The effect would be to suppress the majority of shareholder claims, the letter states, insulating management from accountability for wrongdoing.

The SEC rejected a similar attempt to include forced arbitration in an IPO filing in 1990. The SEC assistant general counsel stated that permitting a company to force its shareholders into private arbitration would be “contrary to the public interest.”

Public Citizen – along with Americans for Financial Reform; American Federation of Labor-Congress of Industrial Organizations (AFL-CIO); American Federation of State, County and Municipal Employees (AFSCME); American Association for Justice; Consumer Federation of America; Leadership Conference on Civil and Human Rights; National Association of Consumer Advocates; and U.S. Public Interest Research Group (U.S. PIRG) – now calls on the SEC to again reject this premise and the Carlyle Group’s registration filing unless the arbitration provisions are removed.

“Carlyle’s ban on shareholder collective or class actions would eliminate a long-recognized tool for vindicating investor rights and tackling extensive wrongdoing, such as massive fraud and antitrust violations,” said Christine Hines, consumer and civil justice counsel with Public Citizen and author of the letter. “If the SEC approves Carlyle’s amendment filing with the arbitration provisions included, it could set a precedent leading to widespread adoption of forced arbitration between companies and their shareholders.”

Forced arbitration would enable companies to violate federal securities laws with near-impunity, the letter said. Serious claims – such as those related to breach of fiduciary duty, fraud, self-dealing, waste of corporate assets, insider trading, accounting scams, and inflated or false financial statements – would be forced into private forums orchestrated by Carlyle and others. Due to the secrecy inherent in private arbitration and the fact that companies write the rules for these proceedings, corporate misconduct likely would escape adequate punishment, public scrutiny, and the SEC’s enforcement or oversight authority.

“Securities claims are not merely ‘private quarrels’ between parties; they often have serious, widespread implications for the integrity of the securities markets and the U.S. economy,” the letter said. “The recent history of corporate scandals – including the recent financial crisis and the accounting scandals that led to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Sarbanes-Oxley Act of 2002 – were precipitated in part by corporate leaders’ ability to shield themselves from accountability. It is imperative that critical corporate activities remain subject to scrutiny by shareholders and the courts, and not insulated by clandestine, corporate-run arbitration proceedings.”

Carlyle’s proposal would harm investors, weaken SEC oversight, and decrease transparency and stability in the financial system, the letter said. The SEC should roundly reject it.


Public Citizen is a national, nonprofit consumer advocacy organization based in Washington, D.C. For more information, please visit www.citizen.org.