Have you ever wondered what a Wells Notice is and why it matters for investors? A Wells Notice is a formal notification from the SEC that it has made a preliminary determination to recommend an enforcement action against a person or a firm. A Wells Notice can have serious implications for the recipient’s career, reputation, and financial situation. In this article, we will discuss the case of Brook Taube, the co-founder and CEO of Medley Management Inc., who received a Wells Notice from the SEC, indicating that the agency is considering filing civil enforcement action against him and Medley Management for potential violations of securities laws.
Who is Brook Taube?
Brook Taube is the co-founder and CEO of Medley Management Inc., a publicly-traded asset manager that specializes in credit investments. Medley Management operates through two business segments: an asset management segment that provides investment advisory services to institutional and retail investors, and an operating company segment that invests in debt securities and loans. Medley Management also sponsors and manages two business development companies (BDCs), Medley Capital Corporation and Sierra Income Corporation, which provide financing to middle-market companies.
Brook Taube is also a digital creator who has a large following on LinkedIn, where he shares his insights on the credit markets, the economy, and the business world. He is known for his entrepreneurial spirit, his vision, and his leadership. He has been recognized as one of the most influential people in the alternative asset management industry by several publications and organizations.
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What are the allegations and the evidence against Brook Taube and Medley Management?
On March 29, 2021, the Securities and Exchange Commission (SEC) accused Brook Taube and Medley Management of deceiving investors and clients by presenting false information that falsely suggested Medley’s anticipated future expansion. The SEC alleged that since at least August 2016, Medley overstated its assets under management (AUM) by including “committed capital” amounts from non-discretionary clients, whose agreements with Medley imposed no obligation to invest with Medley and whose investing activity through Medley was minimal. The SEC also alleged that in June 2018, Brook Taube used positive projections of Medley’s likely future growth, for which he had no reasonable basis, to recommend to advisory clients a merger whereby Medley’s two BDC clients would acquire Medley and give Brook Taube contracts for high-paying jobs.
According to the SEC’s order and press release, the SEC staff found sufficient evidence of wrongdoing by Brook Taube and Medley Management after conducting an investigation that involved reviewing documents, interviewing witnesses, and analyzing data. The SEC staff issued a Wells Notice to Brook Taube and Medley Management in December 2020, notifying them of the SEC’s preliminary determination to recommend an enforcement action against them for violating the antifraud provisions of the federal securities laws.
How did Brook Taube Wells Notice affect Medley Management and its investors?
Brook Taube and Medley Management consented to the entry of the SEC’s order, without admitting or denying the SEC’s findings, and agreed to pay a total of $10 million in civil penalties. The penalty will be paid to bondholders in the bankruptcy proceeding of Medley’s operating affiliate, Medley LLC, which filed for Chapter 11 protection in February 2021. Medley LLC’s bankruptcy was triggered by a default on its debt obligations, which resulted from the decline in Medley’s AUM and revenue.
Medley Management’s stock price plummeted after the Wells Notice was disclosed, and the company faces several lawsuits and investigations from shareholders, creditors, and regulators. Shareholders have accused Brook Taube and Medley Management of breaching their fiduciary duties, making false and misleading statements, and engaging in self-dealing and conflicts of interest. Creditors have challenged the validity and priority of Medley LLC’s debt claims and the proposed restructuring plan. Regulators have launched inquiries into Medley’s compliance and governance practices and the fairness of the proposed merger.
What are the implications and the lessons of Brook Taube Wells Notice for investors?
Brook Taube Wells Notice is a warning sign for investors to be cautious and diligent when evaluating the performance and prospects of asset managers. Asset managers are subject to various risks and uncertainties, such as market fluctuations, regulatory changes, and operational challenges, that can affect their AUM, revenue, and profitability. Investors should not rely solely on the information and projections provided by asset managers, but should conduct their own independent research and analysis, and verify the accuracy and completeness of the data and disclosures. Investors should also be aware of the potential conflicts of interest and incentives that asset managers may have, especially when they are involved in transactions or deals that affect their own interests or compensation.
Brook Taube Wells Notice is also a reminder of the importance and the role of the SEC in protecting investors and maintaining fair and orderly markets. The SEC is responsible for enforcing the federal securities laws and regulating the securities industry, including asset managers and their activities. The SEC conducts investigations and brings enforcement actions against persons or firms that violate the securities laws, such as by engaging in fraud, manipulation, or insider trading. The SEC also issues rules and guidance to promote transparency, accountability, and compliance in the securities markets, and to prevent or deter misconduct and harm to investors.
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Conclusion
Brook Taube is a prominent and influential figure in the asset management industry, who received a Wells Notice from the SEC, indicating that the agency is considering filing civil enforcement action against him and Medley Management for potential violations of securities laws. Brook Taube and Medley Management were charged with making misrepresentations to investors and clients that created the illusion of Medley’s likely future growth. Brook Taube and Medley Management consented to the SEC’s order and agreed to pay a $10 million penalty, which will be paid to bondholders in the bankruptcy proceeding of Medley’s operating affiliate. Brook Taube Wells Notice has had a negative impact on Medley Management and its investors, who have suffered losses and faced lawsuits and investigations. Brook Taube Wells Notice is also a wake-up call for investors to be cautious and diligent when evaluating the performance and prospects of asset managers, and a reminder of the importance and the role of the SEC in protecting investors and maintaining fair and orderly markets.