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Former BDC Giant Fifth Street Management Settles With SEC
Fifth Street allegedly misallocated funds from the business development companies it managed and failed to properly review its BDC clients’ quarterly valuation models, the regulator said on Monday.
The Securities and Exchange Commission has closed a more than two-year-long saga with Fifth Street Management, the once-giant business development company that sold its assets last year, issuing an order on Monday requiring the firm to pay fines totaling $3.98 million.
The SEC said in the order that Fifth Street allegedly misallocated to its clients $1.3 million in rent, compensation, and other overhead expenses that it should have paid. According to the SEC, these over-allocations allegedly resulted in the BDCs’ books and records being inaccurate.
The regulator also alleged that Fifth Street failed to “reasonably conduct quality control reviews” of its BDC clients' quarterly valuation models “for illiquid assets whose values could not be determined by reference to market prices or quotes.” As a result, Fifth Street Management allegedly overvalued two publicly traded BDCs it operated in forms that were filed with the SEC.
The net income for one of Fifth Street Management’s BDCs was allegedly overstated by at least $10 million and up to $22 million, according to the SEC. What’s more, Fifth Street sold additional shares while the inflated figures were outstanding, the SEC alleged.
These allegedly inflated valuations allowed Fifth Street Management’s BDCs to trade at higher prices that they may otherwise have, according to the SEC. The BDCs paid Fifth Street Management based on asset performance and valuation, which means that Fifth Street Management allegedly received higher management fees for these higher valuations, according to the SEC.
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The SEC launched an investigation into Fifth Street Management’s capital allocations and its public statements in 2016, according to a disclosure from Fifth Street Management. The firm managed two publicly traded BDCs, which were called Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp., according to its website.
Fifth Street, which is now virtually defunct after selling its assets to Oaktree Specialty Lending Corp. in 2017, has agreed to pay the fines. It has neither confirmed nor denied the charges against it, according to the SEC’s order.
According to the SEC, some Fifth Street employees "did not understand the level of review required” for financial modeling and failed to flag incorrect or unreasonable inputs to the valuation models.
Fifth Street and the SEC could not be reached for immediate comment. Oaktree declined to comment.