Fifth Street Finance Corp.
Robbins Arroyo LLP: Fifth Street Finance Corp. (FSC) Misled Shareholders According to a Recently Filed Class Action
Robbins Arroyo LLP announces that a securities fraud class action complaint was filed in the U.S. District Court for the Southern District of New York. The complaint alleges that officers and directors of Fifth Street Finance Corp. (NASDAQGS: FSC) violated the Securities Exchange Act of 1934 between July 7, 2014 and February 6, 2015, by making materially false and misleading statements about Fifth Street’s business performance. Fifth Street is a specialty finance company, founded by Leonard M. Tannenbaum, which lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. Fifth Street Asset Management (“FSAM”) is the asset manager and investment advisor for FSC, from which it receives tens of millions of dollars annually for the provision of investment advisory services.
Fifth Street Engages in Scheme to Increase its Asset Manager’s Revenue
According to the complaint, FSC engaged in a fraudulent scheme designed to artificially inflate its assets and investment income in order to increase FSAM’s revenue. FSC uses a form of fair value accounting that prevents investors from ascertaining the actual performance of the company’s investments, while allowing the company to record investment income even if it is never collected. Further, the larger FSC’s asset portfolio became and the more income it recorded, the greater FSAM’s revenue stream would appear to investors and the higher the price at which Tannenbaum could sell FSAM shares to the public. The complaint alleges that to expand FSC’s investment portfolio, FSC was pushed into increasingly risky, speculative investments at unsustainable leverage levels and delayed writing down impaired investments to create the appearance of increasing revenues for FSAM.
On February 9, 2015, FSC reported its fiscal results for the quarter ended December 31, 2014, and revealed that the company’s net investment income decreased by 6% compared to the prior quarter. Further, FSC declared that it would issue zero dividends for February 2015, while decreasing future dividend payments by more than 30%. On this news, FSC common stock fell $1.27 per share, or almost 15%, to close at $7.22 per share on February 9, 2015. On February 23, 2015, Fitch Ratings Inc. downgraded FSC to BB+ from BBB- on negative outlook, and by August 7, 2015, the price of FSC stock had fallen to $6.11 per share, 40% below the class period high of $10.10 per share.
Fifth Street Shareholders Have Legal Options
Concerned shareholders who would like more information about their rights and potential remedies can contact attorney Darnell R. Donahue at (800) 350-6003, or you can complete the form below and we will contact you directly.