The Securities and Exchange Commission has charged publicly traded asset manager Medley Management and its former co-chief executive officers, Brook Taube and Seth Taube, with making misrepresentations to investors and clients that “created the illusion” of future growth. The respondents have agreed to settle the SEC’s charges and will collectively pay $10 million in civil penalties.
Medley Management was delisted from the New York Stock Exchange in July 2021.
The Taube brothers co-founded Medley Management, which controlled Sierra Income Corporation, a non-traded business development company, and several private investment vehicles.
According to the SEC, since at least August 2016, in multiple public filings, including bond offering materials, Medley overstated its assets under management by including “committed capital” from non-discretionary clients, whose agreements imposed no obligation to invest with the firm and whose investing activity was “minimal.”
The Taubes and Medley did not disclose that there was a risk that a significant amount of the clients’ capital would never be invested and would therefore never generate the fee income on which Medley’s financial growth depended, the SEC said.
In 2018, the Taube brothers attempted to merge Sierra, Medley Capital (formerly NYSE: MCC), and Medley Management – with Sierra as the surviving company. One of Medley Capital’s largest shareholders, FrontFour Capital, sued to stop the transactions after competing proposals, including one from NexPoint Advisors, were not considered by the board’s special committee. In March 2019, the Delaware Court of Chancery halted the merger vote until investors were provided with corrective disclosures on the deal.
The SEC claims that “the Taubes used positive projections of Medley’s likely future growth, for which they had no reasonable basis, to recommend to advisory clients a merger whereby Medley’s two business development company clients would acquire Medley and give the Taubes contracts for high-paying jobs.”
The SEC said that the “materially misleading projections” were incorporated into calculations of the “expected” benefit included in the proxy materials that encouraged investors to vote in favor of the transaction.
“Under the federal securities laws, investors are entitled to complete and accurate information about the companies they invest in,” said Lara Shalov Mehraban, acting director of the SEC’s New York regional office. “The Taubes, as the CEOs of a publicly-traded asset manager, failed to ensure that investors were given correct information about the company’s assets under management and adequate disclosures about its risks.”
The Taubes and Medley consented to the entry of the SEC’s order finding that each caused and/or negligently committed violations of the antifraud provisions of the federal securities laws and that they caused and/or committed violations of the reporting and books and records provisions.
Without admitting or denying the SEC’s findings, the Taubes and Medley agreed to cease and desist from committing future violations, to be censured, and to pay a total of $10 million in civil penalties.
They are expected to satisfy their obligation to pay this penalty by making payments to bondholders in the bankruptcy proceeding of Medley’s operating affiliate, Medley LLC.