Once high-flying BDC manager Fifth Street gets SEC slap

  • Fifth Street ran two BDCs
  • Oaktree took over the vehicles last year
  • Firm run by Leonard Tannenbaum

It’s perhaps anti-climactic, but the SEC just settled with Fifth Street Management, a once high-flying BDC manager whose fortunes collapsed on some bad investments.

But the SEC is alleging more than just bad bets. The agency said Dec. 3 that it censured Fifth Street for allegedly overvaluing certain portfolio investments held in a business development company the firm used to run.

SEC also said that Fifth Street, formed by Leonard Tannenbaum, improperly charged expenses to BDC clients.

The firm also allegedly allowed its hedge fund executives to work with BDC clients, giving Fifth Street access to private information about the BDCs’ portfolio investments, the SEC said.

Disgorgement, penalty

Fifth Street agreed to disgorge about $2 million, prejudgment interest of about $334,545 and a civil penalty of about $1.6 million, SEC said. Fifth Street did not admit or deny the charges.

No one from Fifth Street could be reached. Phone numbers at its Greenwich, Connecticut, headquarters were no longer in service.

Fifth Street formerly ran two publicly traded BDCs, Fifth Street Finance Corp and Fifth Street Floating Rate Corp. Like other BDCs, the vehicles sold shares on the public market and lent capital to small and middle-market businesses.

The firm converted to a BDC in 2008, before which it ran private mezzanine funds. 

Last year, Oaktree Capital Group took over management of the two BDCs, according to a statement from the firm. Oaktree agreed to pay $320 million in cash to Fifth Street Management upon close of the deal, the statement said.

As of last year, both BDCs had about $2.5 billion of assets under management, the statement said.

No one from Oaktree replied to a request for comment Monday.

The inflated valuation charges involved two situations where Fifth Street employees failed to update quarterly financial reviews with information about deteriorating performance at two portfolio companies, SEC said in documents. As a result, the quarterly financials that the BDC’s audit committee approved were overvalued, SEC said.

This led to the BDC selling shares using the misstated valuations, SEC said. SEC also found that the BDC paid excess advisory fees to Fifth Street based on the inflated valuations.

SEC claimed Fifth Street improperly charged about $1.2 million in rent and other overhead expenses to BDC clients, as well as about $118,895 for the payment of two Fifth Street employees who helped prepare a Fifth Street affiliate’s IPO filings unrelated to the BDC, the agency said.

Finally, the SEC charged Fifth Street with allowing and even marketing its hedge fund group’s ability to access material nonpublic information about the BDC’s portfolio companies.

Action Item: Read the SEC’s order here: https://www.sec.gov/enforce/33-10581-s