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More than three years have passed since the credit crisis sparked nasty redemption battles between hedge funds and their investors—but some of these fights remarkably continue to pop up. The latest example involves a Redwood City, Calif., fund of funds that wants its $45 million investment in Medley Capital back.
Medley Capital, a $1.4 billion hedge fund firm and investment management shop, has had a tumultuous run pretty much since it was founded in 2005. Its Medley Opportunity Fund was originally conceived by the late Richard Medley, once George Soros’ chief political advisor, partly as an asset-based lender that would have a positive impact on the world by investing with socially-motivated groups like non-governmental organizations, non-profit organizations and government policy makers. Within a year, however, one of Medley’s co-founders was out and the firm moved away from the original concept to focus on investing in the credit markets exclusively for profit.
Even this more modest goal, however, proved to be tricky for Medley Capital. Its hedge fund had to be restructured amid the credit crisis and investor money frozen. It is now run by three of the original founders, twin brothers Brook and Seth Taube, and Andrew Fentress, all of whom had to shut down their last hedge fund, Columbus Nova Partners, in 2005. The brothers Taube and Fentress were working to try to convert Medley’s hedge funds holdings into cash when they had a creative idea. They transferred six income-producing assets valued at $76.3 million, about 10% of the hedge fund’s value, to a new company called Medley Capital Corp., and then last year issued shares in an initial public offering.
Fintan Partners earlier this month sued Medley Capital for breach of contract, claiming Medley has repudiated its contractual obligations to Fintan under a side letter signed in 2007 by refusing to honor Fintan’s right to redeem its interest in the hedge fund and be paid in cash. Medley Capital did not respond to a request for comment. Fintan Partners declined to comment.
The asset transfer to the publicly-traded company has so far been a loser for Medley’s hedge fund investors. They received Medley Capital Corp., shares worth $14.75 each, court documents show, and the stock now trades for $11.30. The stock is also down a bit from its IPO price of $12.
Fintan originally sued Medley, together with Brook and Seth Taube, and Fentress, in February, claiming that the hedge fund managers had “stripped top performing assets” and were benefitting from the IPO because they raised an extra $100 million in new capital on which they stood to earn 1.75% in management fees and up to 20% in performance fees. In the original lawsuit, which Fintan withdrew, the investor said the deal produced no liquidity because the hedge fund managers had not sold any of the shares allocated to the hedge fund and that the outcome could become worse if the publicly-traded vehicle issued more shares to the public. They also complained that they were not given enough of an opportunity to object to the asset transfer of the hedge fund’s assets.
It seems the real goal for Fintan in the first litigation was to stop Medley Capital Corp. from issuing more shares and diluting existing stockholders more. Fintan submitted a request to redeem its investment in December, but Medley countered with a court action filed in the Cayman Islands in February against Fintan seeking a declaration the side letter was nullified by the hedge fund’s restructuring.
