Fifth Street gets slapped with SEC subpoena

The BDC manager is co-operating with an investigation by the regulator related to its business practices, it revealed in filings. The firm also plans to settle its class action lawsuits with a $23m payment. 


Fifth Street Asset Management is being investigated by the Securities and Exchange Commission over the firm's metrics for valuing its investments, as well as expenses charged by its two business development companies.

According to SEC filings last Thursday, the US regulator sent a subpoena to the manager in March. The investigation targets statements made by FSAM to the BDCs' board members, its shareholders and prospective clients “concerning the fair value of Fifth Street Finance Corp's (FSC) portfolio companies or investments, as well as expenses allocated or charged to FSC and Fifth Street Senior Floating Rate (FSFR)”.

It cites issues relating to the firm's implementation of the Investment Advisers Act of 1940, which governs BDCs. The regulator also brings up potential omissions in the BDCs' previous SEC filings and questions the vehicles' “books, records and accounts and whether they fairly and accurately reflected the entities' transactions and dispositions of assets”.

In the filing, Fifth Street said: “The subpoenaed Fifth Street entities are co-operating with the Division of Enforcement investigation, have produced requested documents and have been communicating with Division of Enforcement personnel.”

A Fifth Street spokesman declined to comment further.

The SEC investigation adds to the BDC manager's litany of woes. The firm has been the subject of multiple class action lawsuits and shareholder activism over the past year that accuse it of gross mismanagement and underperformance.

The filings disclosed how FSAM plans to settle its class action lawsuits with a $14 million payment to shareholders who purchased FSC stock between July 2014 and February 2015. Most of the settlement will be paid using the firm's insurance coverage, FSAM said in the filing. FSAM, which went public in November 2014, will settle its own class action claims with a $9.25 million payment to shareholders that bought into its IPO.

Since the flotation, the share prices of the BDCs and FSAM have fallen sharply. FSAM stock dropped from $15 per share in 2014 to about $4 on Monday. FSC declined from $10 a share in 2014 to about $6, while FSFR is trading at $9 per share, down from $14 in 2014.

Many senior and junior employees have also left, while founder Len Tannenbaum has been shopping the business , or parts of it, to potential buyers with Morgan Stanley assisting on the sales process, as PDI exclusively reported in June.