Kohlberg Capital Sued Over Alleged Fraud

NEW YORK (Reuters) – Kohlberg Capital Corp (KCAP.O) has been sued by a Michigan investor who said the investment company taken public in 2006 by a firm affiliated with buyout specialist Jerome Kohlberg fraudulently misstated the value of its portfolio.

The lawsuit filed Thursday in Manhattan federal court seeks class-action status, and names Chief Executive Dayl Pearson and Chief Financial Officer Michael Wirth as other defendants. It alleges that Kohlberg Capital misled investors about how it valued its holdings as early as March 2009.

In November, auditor Deloitte & Touche LLP questioned how the company was valuing its loan portfolio, and Kohlberg Capital delayed filing third-quarter results.

Then on Dec. 15, Kohlberg Capital said investors should not rely on its financial statements for 2008 and the first half of 2009. Nine days later it released a letter from Deloitte saying that management “essentially ceased providing substantive information” on Dec. 14 and that “significant unanswered questions and unfulfilled information requests” remained.

Dennis Angeleri, the plaintiff, in his complaint said Pearson and Wirth’s conduct “artificially inflated Kohlberg’s stock price and operated as a fraud or deceit on purchasers of Kohlberg stock by misrepresenting the company’s financial condition and business prospects.”

The lawsuit seeks compensatory damages and other remedies. The class period covers March 16 to Dec. 24. While Kohlberg Capital shares more than doubled in that period, they have lost one-third of their value since peaking at $6.90 on July 2.

Denise Rodriguez, a Kohlberg Capital spokeswoman, did not immediately return a call seeking comment.

Jerome Kohlberg, Henry Kravis and George Roberts founded leveraged buyout firm Kohlberg Kravis & Roberts Co in 1976.

Kohlberg Capital conducted a roughly $200 million initial public offering in December 2006, and used net proceeds to buy corporate debt, regulatory filings show.

In late afternoon trading on the Nasdaq, Kohlberg Capital shares were down 7 cents at $4.56.

The case is Angeleri v. Pearson et al., U.S. District Court, Southern District of New York, No. 09-10609.
(Reporting by Jonathan Stempel, editing by Matthew Lewis)

Earlier coverage: Does Deloitte Not Understand Fair Value Accounting?