Activists launch investigation into Medley Management

Several law firms and the Shareholders Foundation have announced an investigation into potential securities law violations by the lending firm. Medley also announced its second quarter results, which show an AUM increase but a revenue drop stemming from some credit losses.      

At least five law firms and a foundation that represents shareholders in California have recently announced investigations into Medley Management (MDLY). San Diego-based Shareholders Foundation alleges that the lending firm misrepresented its financial health and growth prospects when it went public in September last year.

The law firms that issued statements seeking shareholders to co-operate with an investigation include the Law Offices of Howard G. Smith, Levi & Korsinsky, Scott+Scott, Robbins Arroyo and Goldberg Law PC.

The foundation’s statement said that the investigation has been launched on behalf of Medley Management shareholders “concerning whether a series of statements by Medley Management regarding its business, its prospects and its operations were materially false and misleading at the time they were made”.  

The Shareholders Foundation and law firms did not respond to requests for comment. None of the statements outlined what securities law violations they are investigating.

The statements all point to the sharp decline in Medley’s stock price since the company went public: from $17 per share last September to $8 per share as of 14 August. The statements also reference a subpoena issued by the Department of Financial Services in December related to the activities of a payday lending firm that Medley lent to. A source close to Medley said that the subpoena was related to an investigation of the payday lender and has since been dropped, while the loan has already rolled off Medley’s books.  

Medley executives declined to comment to PDI on the investigations. Though on the firm’s earnings call last week, chief executive Brook Taube said that the investigations have no basis in actual fact and he doesn’t expect to incur much or any additional legal costs from them.

PERFORMANCE

Medley Management released its second quarter financial results last week and on a call with analysts the firm’s management emphasised that fee-earning assets under management have increased considerably, 37 percent year-on-year (y-o-y). The firm also experienced a drop in revenue, driven by poor performance on its private Medley Opportunity Fund II.

Performance fees for the quarter were down $2.4 million, primarily due to valuation adjustment. Because of these adjustments, total revenues decreased by 19 percent y-o-y, said chief financial officer Rick Allorto on Medley’s earnings call last week.

Executives said the fall in performance was mostly tied to one investment in Modern VideoFilm, the founder of which is suing Medley, as he announced in June.

Medley’s publicly traded BDC, the Medley Capital Corporation (MCC), meanwhile has been trading at a deep discount to book value (0.74x as of 13 August) and has therefore been unable to issue fresh equity capital for some time. The vehicle, which with about $1.3 billion in assets is the firm’s largest, has also experienced some paper losses, mainly stemming from one investment. Executives said the vehicle had experienced a net realized loss of $9 million mainly driven by an investment in Family Christian, a chain of Christian book and gift stores that is going through bankruptcy.

In an attempt to bolster the share price, executives announced $30 million in share buybacks for MCC and $5 million for MDLY. They’ve also boasted that the firm has grown its fee-earning assets under management by raising more money for the private Sierra Income Corporation BDC.

Both BDCs have also recently started new investment joint ventures with the Great American Life Insurance Company, which are initially targeting a 1:1 debt–to-equity ratio and have each secured a $100 million credit line.

The firm has made senior hires as well. David Indelicato joined in July as head of credit management. He was previously a senior vice president and team leader at GE Capital for nine years.

On the earnings call last week, Taube mentioned that Medley Management was reviewing other “strategic options” in terms of product expansion and development. “At one end of the spectrum that would be moving toward more broadly syndicated loans,” including CLOs and a long-only business. “The risk retention rules that are pending have created a very interesting dynamic there,” he said, adding that he’s also exploring “alternative yield products” and future non-traded BDC launches.

A recent research report on MCC from Wells Fargo BDC analyst Jonathan Bock said: “Our view is that with MCC currently trading at a discount and utilizing share repurchases, management has started moving in the right direction, however, we remain sidelined as we wait to see the longevity of the improvements and wait for credit quality to stabilize.” Credit losses have continued but appear to be stabilizing lately at the BDC, Bock’s report, issued on 12 August, said.

In January, the management of Medley’s first private fund was transferred to work-out firm Crestline-Kirchner. The Medley Opportunity Fund (MOF) was a 2006 vintage and had several stakes that soured through the financial crisis and had turned into equity investments. Because of this, poor performance on that fund and the fact that its investment lifecycle was over, the management was handed over to Crestline-Kirchner.