Fifth Street Asset Management will pay nearly $4 million in penalties to settle claims it misallocated certain expenses to its former business development company clients and failed to reasonably conduct quality control reviews of clients' quarterly valuation models, causing one client to materially overstate its net income, the SEC announced.
According to the Securities and Exchange Commission, Fifth Street Asset Management in 2013 and 2014 improperly allocated to its clients $1.3 million in rent, other overhead, and compensation expenses the firm should have paid.
Also, Fifth Street Asset Management was responsible for conducting the quality control review of its BDC clients' quarterly valuation models for illiquid assets whose values could not be determined by reference to market prices or quotes, but failed to do so in a "reasonable manner," the SEC said. That led to one of the BDCs to overvalue two portfolio companies, causing its financial statements in three SEC filings for 2014 to materially misstate net increase in assets resulting from operations and earnings per share, according to the SEC. And in July 2014, the BDC offered and sold additional shares of its stock while these inflated net income and EPS figures were outstanding.
Fifth Street Asset Management once managed two publicly traded BDCs: Fifth Street Finance Corp. and Fifth Street Senior Floating Rate Corp. In 2017, Oaktree Capital Group became the investment adviser to both BDCs in a $320 million deal and has since renamed them. Fifth Street Asset Management, which did not admit to or deny any of the SEC's findings, is no longer an investment adviser registered with the agency; officials there could not immediately be reached for comment.
Under the settlement, Fifth Street Asset Management will pay disgorgement of just more than $1.999 million, prejudgment interest of $334,545, and a civil money penalty of $1.65 million to the SEC.