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SEC fines asset managers $10 million for misleading investors

On Behalf of | May 12, 2022 | Securities Fraud |

A publicly traded asset manager, Medley Management, and its two co-CEOs are facing charges of misleading clients and investors. The company and its leaders are accused of making misrepresentations “that created the illusion of Medley’s likely future growth.” In fact, Medley’s growth depended on fee income, and the co-CEOs were relying on unjustifiably rosy projections.

Now, the company and its co-CEOs have agreed to settle the charges in exchange for $10 million in civil penalties.

According to the Securities and Exchange Commission, Medley overstated its assets in public filings, including bond offering materials, since at least August 2016. It did this by including funds from non-discretionary clients who had no obligation to invest with Medley. Moreover, those clients only invested minimally through Medley, so there was no reason to believe the funds would generate fees for the asset manager.

In other words, those investing in Medley were led to believe that big clients were committed to work with Medley, which they were not. There was a substantial risk, therefore, that those clients would never end up paying fees to Medley, and Medley relied on those imagined fees when selling itself to new investors.

Additionally, in June 2018, the co-CEOs made up positive growth projections when attempting a merger. The co-CEOs hoped that two business development company clients would buy Medley and provide the pair with high-paying jobs. The positive growth projections had no reasonable basis, but they were included in calculations used in proxy materials encouraging investors to vote in favor of the merger.

The SEC called foul on these projections and their use in disclosures such as the bond offering and the proxy materials.

“Under the federal securities laws, investors are entitled to complete and accurate information about the companies they invest in,” said a spokesperson for the SEC’s New York office. “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 co-CEOs settled the SEC’s charge without admitting or denying the agency’s findings. However, they agreed to cease and desist from future violations, to be censured, and to pay $10 million in civil penalties, which will be paid to bondholders in an affiliated bankruptcy proceeding.

The SEC is not the only recourse for investors

As the SEC says, federal securities laws require companies to provide complete, accurate information when seeking investments. When companies fail to do so, they can be charged civilly or criminally with securities fraud.

When investors learn that they were misled, they can also take action by suing the company for fraud or taking their case to arbitration through the Financial Industry Regulatory Authority (FINRA).

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