Investment Adviser Settles Charges Related to Expense Misallocation and Valuation Review Failures
Dec. 3, 2018
File No. 3-18909
December 3, 2018
The Securities and Exchange Commission announced today that Fifth Street Management LLC, formerly an SEC-registered investment adviser based in Greenwich, Connecticut, has agreed to settle charges relating to the misallocation of certain expenses to its business development company clients and failing to reasonably conduct the quality control reviews of its business development company clients' quarterly valuation models, causing one client to materially overstate its net income.
According to the SEC's Order, Fifth Street Management LLC improperly allocated to its clients $1,327,405 in rent, other overheard, and compensation expenses that Fifth Street Management LLC should have paid. Fifth Street Management LLC also failed to conduct in a reasonable manner the reviews of its clients' quarterly valuation models, resulting in one client overvaluing two portfolio companies. This caused the client's financial statements for the periods ended March 31, June 30, and September 30, 2014, to materially misstate net income and earnings per share. While the March 31 and June 30, 2014 materially misstated financial statements were outstanding, the client issued overvalued shares to the public.
The SEC's Order finds that Fifth Street Management LLC violated the antifraud and policies and procedures provisions of Sections 204A, 206(2), 206(4), and 207 of the Advisers Act and Rules 206(4)-7(a) and 206(4)-8(a)(2), thereunder. The SEC's Order further finds that Fifth Street Management caused a client's violation of the antifraud provision Section 17(a)(2) of the Securities Act of 1933, and caused its clients' violations of the reporting, books and records, and internal controls provisions of Securities and Exchange Act of 1934 and the Investment Company Act of 1940. The Commission ordered Fifth Street Management LLC to cease-and-desist from committing or causing any violations of the aforementioned provisions. The Commission also censured Fifth Street Management LLC and ordered it to pay disgorgement in the amount of $1,999,115, prejudgment interest in the amount of $334,545, and a civil money penalty of $1,650,000. Finally, the SEC's Order created a Fair Fund pursuant to the Sarbanes-Oxley Act of 2002 for the disgorgement, prejudgment interest, and penalty.
The SEC's investigation was conducted by John Rossetti and Gary Peters, and supervised by Douglas McAllister.