Sierra Income Corporation, a non-traded business development company, reported to the Securities and Exchange Commission on Friday that Brook Taube resigned as a Class II director on May 17th.
According to the filing, “Taube did not express any disagreement on any matter relating to the company’s operations, policies or practices.” Following his resignation, the board reduced its size from six directors to five.
The DI Wire reported last month that Brook’s twin brother, Seth Taube, resigned as Sierra’s chief executive officer and as a director on April 27, 2021, and was replaced by Dean Crowe, the company’s president.
The Taube brothers co-founded and are majority owners of Medley Management (NYSE: MDLY), an alternative asset management firm that claims to have $2.9 billion of assets under management in Sierra and several private investment vehicles, according to their website.
On May 3, 2021, the brothers both resigned as co-CEOs of Medley Management, however, the company said that they are expected to continue serving as co-chairmen of the board.
The SEC’s Division of Enforcement notified Medley Management in December 2019 that the company was the subject of a “formal investigation.” Then, earlier this month, the SEC division sent Wells notices to Medley Management, Medley LLC, and “six pre-IPO owners” of Medley, who are current or former officers of the company.
According to Medley Management’s most recent annual filing, the pre-IPO owners are believed to be Brook Taube, Seth Taube, Richard Allorto, Jr. (chief financial officer), Christopher Taube (brother and senior managing director, head of institutional fundraising), John Fredericks (former general counsel and named executive officer for 2020), and Jeffrey Tonkel (former president and former director).
“The Wells notices informed MDLY, Medley LLC and the individuals that the [SEC’s Division of Enforcement] has made a preliminary determination to recommend that the SEC file an enforcement action against [the recipients] that would allege certain violations of the federal securities laws,” according to a recent SEC filing.
The notices, which are not formal charges of wrongdoing, indicated that the “proposed action” would allege violations relating to both companies’ assets under management disclosures, as well as other disclosures made by the companies, including those made in Medley Management’s registration statement about its initial public offering, among other alleged violations.
The recipients “currently intend to pursue the Wells notice process, which will include the opportunity to respond to the [SEC’s Division of Enforcement] position,” the filing stated.
In August 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.
Julie Segal’s article, Two Harvard Twins (No, Not Those Twins) Run One of the World’s Worst BDCs, published in Institutional Investor in October 2019, details the ongoing Medley saga, as well as the Delaware Chancery court case resulting from the now-defunct three-way merger proposal.
“The Medley Capital directors were found to have breached their fiduciary duty through both incompetence and by breaking governance rules,” wrote Segal. “The judge wrote a scathing opinion after the trial, declaring the entire process unfair: ‘This post-trial decision finds that the proposed transactions trigger the entire fairness test. FrontFour proved that half of the Medley Capital special committee was beholden to the Taube brothers, and thus the Taube brothers dominated and controlled the board with respect to the proposed transactions.'”
According to the judge’s opinion, a technicality prevented the court from permanently stopping the transaction: “FrontFour failed to prove that the acquirer, Sierra, aided and abetted in the other defendants’ breaches of fiduciary duties.”
Alleged violations to Medley Management’s financial projections that were used in the joint proxy statement/prospectus of the terminated merger proposal were also mentioned in the Wells notices.
Medley LLC is the operating company of Medley Management which has outstanding bonds that trade on the NYSE under “MDLX” and “MDLQ.” The company filed a proposed plan of reorganization under Chapter 11 in a Delaware bankruptcy court in March, but the plan was withdrawn earlier this month. Medley LLC said that the company intends to file an amended plan with the court “as soon as reasonably practicable.”
Medley Capital, a publicly-traded BDC, transferred its shares from the NYSE to the NASDAQ earlier this year, changed its name to PhenixFIN Corporation (NASDAQ: PFX), and internalized its management.
Sierra is a non-traded business development company that invests primarily in first lien senior secured debt, second lien secured debt and, to a lesser extent, subordinated debt of middle market companies in a range of industries with annual revenue between $50 million and $1 billion. The BDC’s portfolio has 83 holdings totaling nearly $604 million. Sierra is externally managed by SIC Advisors LLC, an affiliate of Medley Management (NYSE: MDLY).