Robbins LLP: A newly filed class action alleges that Fifth Street Finance Corp. (FSC) misled investors.

 

Robbins LLP has announced that a class action complaint alleging securities fraud has been filed in the Southern District of New York U.S. District Court. According to the lawsuit, officials and directors of Fifth Street Finance Corp. (NASDAQGS: FSC) made materially false and misleading statements about the company’s performance between July 7, 2014, and February 6, 2015, in violation of the Securities Exchange Act of 1934. Leonard M. Tannenbaum founded Fifth Street, a specialist finance firm that makes loans to and investments in small and mid-sized businesses, primarily to investments made by private equity sponsors. The asset manager and investment advisor for this is Fifth Street Asset Management, or “FSAM.”

Tens of millions of dollars are paid to FSC each year to provide financial advising services.

Fifth Street Initiates Plan to Boost Revenue from Asset Manager

 

To boost FSAM’s revenues, the complaint claims that FSC participated in a dishonest plan that involved inflating its assets and investment profits. Using fair value accounting, FSC keeps investors from knowing how well the firm’s investments have performed while enabling the corporation to record investment income even if it is never paid. Furthermore, investors would perceive FSAM’s revenue stream as stronger the larger the FSC’s asset portfolio and the higher the income it earned, and Tannenbaum might sell FSAM shares to the public at a higher price. According to the lawsuit, FSC was forced to take on more risky and speculative investments at unaffordable leverage levels to diversify its investment portfolio. FSC also allegedly delayed writing down impaired investments to give the impression that FSAM’s revenues were rising.

In its fiscal reports for the quarter that concluded on December 31, 2014, FSC stated on February 9, 2015, that the company’s net investment income had dropped by 6% from the previous quarter. Moreover, FSC announced that it would not pay any dividends in February 2015 and that it would cut its dividend payments by almost 30% going forward. FSC common stock closed at $7.22 per share on February 9, 2015, after falling $1.27 per share, or nearly 15%, in response to this news. Fitch Ratings Inc. downgraded FSC to BB+ from BBB- on February 23, 2015, citing a negative outlook. By August 7, 2015, the price of FSC stock had dropped to $6.11 per share, which was 40% less than the peak of $10.10 per share during the class period.

 

Shareholders of Fifth Street Have Legal Choices

 

Shareholders who are concerned about their rights and possible remedies can get in touch with attorney Darnell R. Donahue by calling (800) 350-6003 or filling out the form below, and we will get in touch with you.

 

Fifth Street Asset Management Inc.

 

Enters into Agreement for Oaktree to Assume Management of Business Development Companies Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp. Transaction Represents Culmination of Strategic Review Process GREENWICH, Conn., July 14, 2017 (GLOBE NEWSWIRE) — Fifth Street Asset Management (NASDAQ: FSAM) (“FSAM”) today announced that it has signed a definitive asset purchase agreement with Oaktree Capital Management, L.P. (“Oaktree”), an affiliate of Oaktree Capital Group, LLC (NYSE: OAK), under which Oaktree will become the new investment adviser to two Business Development Companies (“BDCs”): Fifth Street Finance Corp. (NASDAQ: FSC) (“FSC”) and Fifth Street Senior Floating Rate Corp. (NASDAQ: FSFR) (“FSFR”). Oaktree will pay a gross cash consideration of $320 million in cash to Fifth Street Management LLC (“FSM”), an affiliate of FSAM, upon the close of the transaction. The shares of common stock of FSC and FSFR owned by Fifth Street Holdings L.P. (“FSH”) are not included in the transaction. The transaction is expected to be completed in the fourth quarter of 2017. The transaction follows a strategic review conducted by the FSAM management team and Board of Directors, including a Special Committee, in conjunction with legal and financial advisors, of a range of alternatives to maximize the value of the Fifth Street platform. A Special Committee of FSAM’s Board of Directors was formed to review the asset sale transaction and related matters, and the Board of Directors each unanimously determined that this transaction was in the best interest of FSAM and its stockholders. “We believe this transaction combining FSAM’s established presence in the BDC space and Oaktree’s deep credit expertise offers a compelling value for FSAM’s assets and allows the FSC and FSFR stockholders to participate in the future growth potential of the portfolio under a larger, more diversified manager led by a highly experienced investment team. Oaktree’s long-term investment approach, emphasizing return consistency and downside protection, along with its proposed fee structure, made Oaktree the appropriate manager to stabilize and grow the BDC portfolios, which should provide enhanced returns for FSC and FSFR stockholders going forward. We have recommended and fully support the FSC and FSFR boards’ decision to approve the agreements with Oaktree,” said Leonard M. Tannenbaum, FSAM’s Chairman and Chief Executive Officer. Tom Harrison, the Chairman of the Special Committee of FSAM’s Board of Directors, said, “After careful consideration of the proposed transaction with Oaktree and FSAM’s other potential alternatives, the Special Committee has determined that the proposed transaction with Oaktree is the best alternative course of action for, and is in the best interests of, FSAM and its stockholders.” At the closing of the transaction, Oaktree will replace FSM as the investment adviser to the BDCs and an Oaktree affiliate will become their administrator. Under Oaktree’s proposed investment advisory agreements, the management fee rate for FSC will be reduced from 1.75% to 1.50%, and the incentive fee will be reduced from 20.0% to 17.5% concerning both income and capital gains. The incentive fee for FSFR will also be reduced from 20.0% to 17.5% concerning both income and capital gains. The current FSFR management fee rate of 1.0% will remain unchanged. The new investment advisory agreements, which have been unanimously approved by the independent directors of the boards of directors of FSC and FSFR, are subject to approval by the stockholders of FSC and FSFR. The FSC and FSFR boards of directors unanimously recommend that the stockholders of each BDC vote in favor of the new investment advisory agreement with Oaktree and related corporate governance matters, including the new director nominees. FSH and Mr. Tannenbaum have agreed to vote their shares in favor of the proposed investment advisory agreements and related corporate governance matters, including the new director nominees. At the transaction’s closing, all current FSC board members except Richard P. Dutkiewicz, and all current FSFR board members except Richard W. Cohen, will resign. Each BDC board has nominated Marc H. Gamsin, Craig Jacobson, Richard G. Ruben and Bruce Zimmerman as new independent directors and John Frank, Vice Chairman of Oaktree, as a new interested director of the board, each of whom would take office upon approval of the stockholders and closing of the transaction. Mr. Frank is expected to serve as Chairman of each BDC board. The executive officers of FSC and FSFR will resign and will be replaced with certain individuals affiliated with Oaktree at the transaction’s closing.