It’s been two weeks since the private equity firm Carlyle Group, LP reversed its ill-advised decision to include provisions in its initial public offering filing that would have forced its investors into arbitration and forbid them from banding together in class actions to resolve disputes against it. The company submitted another SEC filing dated February 13 (Amendment 3 to its registration statement), and these documents lacked any reference to forced arbitration or denying investors the right to participate in class actions. However, the filing retained a number of other restrictions on investors, including limits on voting rights and denying investors the ability to remove the general partner, as well as eliminating the general partner’s fiduciary duties.
On the day Carlyle announced its about-face, consumer advocacy, civil rights, and labor groups had submitted a joint letter to the SEC asking it to take appropriate action to deny this filing. The groups’ letter said, in part:
“Industry observers have noted that 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. These observers contend that 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. Corporations and partnerships under the Commission’s oversight employ millions of Americans and are owned or invested in by millions more. 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.”
Due to the firm’s reversal, the SEC was not compelled to publicly act on the matter, but the agency must remain alert to other entities that may attempt a similar “Carlyle” tactic. And it should be prepared to use its authority to quickly squash those efforts.