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Recovering Losses Caused By Investment Misconduct

Meyer Wilson Investigating Investor Losses in Business Development Companies

The investment fraud attorneys at the Meyer Wilson law firm have seen an increase in instances of brokerage firm customers, particularly retirees and senior investors, being sold shares of business development companies or “BDCs.” These investments have become especially popular with brokers and brokerage firms in recent years because BDCs often promise higher yields than traditional fixed income investments like treasuries, high-grade corporate bonds, or CDs.

Although the yields can be attractive, investors need to be extremely cautious before investing in any BDC. BDCs are often illiquid, volatile, and very expensive. Unless you have a very high risk tolerance, BDCs should not comprise any significant part of your investment portfolio. If you lost money investing in a BDC, the lawyers at Meyer Wilson would like to speak with you.

At their most basic level, BDCs are a type of closed-end mutual fund. Some BDCs are publicly traded, but many BDCs do not trade on a listed stock exchange. BDCs were created by a 1980 federal law enacted to provide small, privately-traded companies with greater access to financing in the capital markets. BDCs are similar to private equity and venture capital funds in that they use proceeds from their investors to invest in small and medium-sized private companies. Under the law, at least 90% of a BDC’s annual income must be distributed to shareholders.

Unlike many plain-vanilla mutual funds, however, BDCs come with significant downsides and risks. Many BDCs are illiquid, meaning you may not have access to your money for long periods of time. BDCs are also incredibly risky. In addition, BDCs typically use leverage (that is, they rely on borrowed funds to try to produce higher-than-average returns), which can cause your losses to multiply and lead to volatile swings when the investments held by the fund lose value. Adding to the risk is the fact that BDCs also often invest in companies with high credit risk, so there can be a significant default risk on the underlying investment. BDCs can also be very sensitive to interest rate changes and especially volatile in an increasing rate environment.

Several BDCs have recently suffered significant losses. In May 2017, Apollo Investment Corporation, a large publicly-traded BDC, announced yet another decline in book value on a per-share basis due to investment losses. Shares on Apollo are still down approximately 10 percent since the announcement. In May 2016, Sierra Income Corporation, a non-traded BDC, filed documents with the SEC in connection with a tender offer to purchase shares of outstanding stock. Based on publicly-filed documents, it appears that the tender offer price resulted in substantial losses for the investors who made the initial capital investment.

Regulators are keeping a closer eye on BDCs. Earlier this year, the Financial Industry Regulatory Authority (FINRA), the self-regulatory organization charged with policing brokerage firms, announced that BDCs were a top regulatory priority. In its announcement, FINRA stated:

While these products can be appropriate for some customers, certain non-traded REITs and unlisted BDCs, for example, may have high commissions and fees, be illiquid, have distributions that may include return of principal, have limited operating history, or present material credit risk arising from unrated or below investment grade products. Given these concerns, firms should make sure that they perform and supervise customer-specific suitability determinations. More generally, firms should carefully evaluate their supervisory programs in light of the products they offer, the specific features of those products and the investors they serve.

Among some of the largest publicly-traded BDCs that we have seen in client portfolios are:

  • Apollo Investment Corporation (AINV)
  • Ares Capital Corporation (ARCC)
  • BlackRock Kelso Capital Corporation (BKCC)
  • Fifth Street Finance Corporation (FSC)
  • FS Investment Corporation (FSIC)
  • Gladstone Investment Corporation (GAIN)
  • Golub Capital GBDC, Inc. (GBDC)
  • Hercules Technology Growth Capital (HTGC)
  • Horizon Technology Finance Corporation (HRZN)
  • KCAP Financial, Inc. (KCAP)
  • Medley Capital Corporation (MCC)
  • PennantPark Investment Corporation (PNNT)
  • Prospect Capital Corporation (PSEC)

We have also seen many of the largest non-traded BDCs in client portfolios, including:

  • FS Investment Corporation II
  • Corporate Capital Trust, Inc.
  • FS Energy & Power Fund
  • FS Investment Corporation III
  • Business Development Corporation of America
  • TCW Direct Lending LLC
  • CĪON Investment Corporation
  • Sierra Income Corporation

Brokerage firms are required under the law and industry rules to provide recommendations to their customers that are appropriate based on the customer’s unique circumstances. Brokerage firms are also required to conduct extensive due diligence on any BDC before allowing their brokers to sell them.

If you lost money in a BDC sold to you by your financial advisor, please contact the attorneys at Meyer Wilson for a complimentary case evaluation. We work strictly on a contingency fee basis and never charge a retainer.

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