Carlyle Group co-founder Bill Conway was in court on this small island last week recounting one of the most bruising episodes in his private-equity firm’s history: the 2008 collapse of mortgage-bond fund Carlyle Capital Corp., the Wall Street Journal reported today. Carlyle Capital Corp. (CCC) borrowed vast sums from banks to buy $23 billion in bonds. When a deteriorating U.S. housing market spooked CCC’s lenders, investors in the fund lost their entire $945 million in capital. Conway was summoned to Guernsey, where the fund was registered a decade ago, to testify in a $1 billion civil lawsuit by CCC’s liquidators. They allege that Conway and six other Carlyle and CCC officials acted recklessly and should have started selling the fund’s assets months before it failed. For six days this month, Conway answered questions from a lawyer of the liquidators about the fund’s business model, governance and funding problems. Among the specific allegations against him: that he refused to have CCC sell assets or restructure as loans dried up in the summer of 2007 because he didn’t want bad publicity from CCC to jeopardize an investment by an Abu Dhabi government fund in Carlyle Group. Conway denies that.
