Capitala Finance Corp. Accused of Covering Up Allegedly Foreseeable Investment Failures

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Capitala Finance Corp. is facing a proposed class action along with its CEO and CFO that accuses the parties of misleading investors as to the company’s performance. The complaint explains that Capitala Investment Advisors, LLC manages the defendants’ investments and, in exchange, charges a base management fee plus an incentive fee determined by Capitala Finance’s performance. In January 2016, the suit continues, Capitala Investment Advisors announced that it had chosen to waive the incentive fee. Unbeknownst to investors, this caused the firm to lose “professional talent in both underwriting and portfolio management,” the case alleges, resulting in the underperformance of a significant number of its investments.

In August 2017, the defendants reportedly revealed to stockholders that six of its investments had fallen into non-accrual status, allegedly causing company stock prices to plummet by 30 percent. The suit argues that between January 2016 and August 2017, the defendants falsely assured investors that the company was performing well despite knowing its investment manager’s loss of key employees would have negative effects on its finances.