Medley Management Fined $10M and given Cease and Desist

Medley Management

Brook Taube and Seth Taube, formerly the co-chief executive officers of Medley Management, stand charged with creating an ‘illusion’ of future growth through the misrepresentations they made to investors and clients, by the Securities and Exchange Commission (SEC).

The respondents have agreed to pay civil penalties amounting to $10 million, collectively, in settlement of the charges. In July 2021, Medley Management, co-founded by the Taube brothers, was delisted from the NYSE (New York Stock Exchange).

Several private investment vehicles and the non-traded business development company Sierra Income Corporation were part of the Medley portfolio.

The Charges

The SEC has revealed that Medley has been guilty of consistently overstating its assets under management (AUM) in multiple filings through the inclusion of ‘committed capital’ from non-discretionary clients. This has been done since at least August 2016.

Non-discretionary clients’ investing activity was ‘minimal.’ Besides, they had no commitment to invest with the firm. The ever-present risk of a significant part of that capital would never be invested, and, therefore, the projected fee income on these investments, the expected driver of growth for the company, would never be realized, was never disclosed by the Taubes.

There was an attempt by the Taube brothers of merging Medley Capital (formerly NYSE: MCC), and Medley Management with Sierra, with Sierra as the sole surviving entity, around 2018. When competing proposals were not evaluated by the special committee appointed by the board, including one proposal from NextPoint Advisors, FrontFour Capital, one of the largest investors of Medley Capital, went to court to stop the transaction. The merger vote was halted by the Delaware Court of Chancery in March 2019 until investors had been provided with the relevant corrective disclosures regarding the deal.

The Taubes using “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” has been alleged by the SEC.

Lara Shalov Mehraban, acting director of the SEC’s New York regional office, added that “Under the federal securities laws, investors are entitled to complete and accurate information about the companies they invest in. 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.”

Through the incorporation of ‘materially misleading projections’ in the calculation and projection of ‘expected’ benefits in the proxy materials, investors were being influenced to vote in favor of the deal, the SEC said.

The Settlement

Without an admittance or denial of the SEC findings, Medley, as well as the Taube brothers, have agreed to the entry of the SEC order holding them as having caused and/or negligently violated antifraud provisions under federal securities laws apart from having caused and/or negligently violated provisions related to book-keeping and records. They have also agreed to cease and desist from committing future violations, apart from paying $10 million in civil penalties.

The settlement of this penalty obligation is expected to be in the form of payments to bondholders in the bankruptcy proceedings of Medley LLC, an operating affiliate of Medley.

 

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