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Capitala Finance: Lawsuit Dismissed

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On August 20, 2019, Capitala Finance (CPTA) filed a Form 40-33: the dismissal of a lawsuit against the BDC, which was filed in 2018. The plaintiffs contended the BDC and its managers made misleading statements at the time CPTA had several loans go on non accrual and its dividend was reduced and stock price dropped sharply.

In One Corner

According to the legal document filed “Plaintiffs are two purchasers of Capitala’s common stock during the period of January 4, 2016 through August 7, 2017 (the putative “Class Period”) who seek to represent a class of purchasers of Capitala’s securities during the Class Period who were allegedly damaged by the disclosures made by the Company at the end of the Class Period”.

And In The Other…

On the CPTA side, the parties involved were identified as follows: “During the relevant period, the Investment Advisor’s management team was comprised of Alala, Arnall, John F. McGlinn (“McGlinn), the Company’s Chief Operating Officer, and Hunt Broyhill (“Broyhill”), a member of the Company’s Board of Directors. ¶23. Alala, McGlinn, and Broyhill also served as the Investment Advisor’s investment committee”.

Core Argument

The nub of the complaint seems to have been that CPTA did not fully divulge the “brain drain” that occurred at the BDC following credit troubles and after fee waivers had been made to shareholders:

“Plaintiffs further allege that during the course of the Class Period, the Investment Advisor was experiencing what Defendants would later refer to as a “significant loss of professionals” in both underwriting and portfolio” management. ¶56. The Investment Advisor’s staff shrunk from 18 “investment professionals” in March 2015 to 11 two years later in March 2017 – a reduction of approximately 40 percent ¶¶30, 38, 46.5 This “drain of talent,” as Alala later referred to it, “mainly occur[red] in ’15 through when we started hiring again last December [2016].” ¶56. This litigation followed the second quarter of 2017, when Capitala announced on August 7, 2017 that six of its investments were on non-accrual status. ¶ 1. Also, Plaintiff alleges that Defendants did not disclose the Investment Advisor’s so-called “brain drain” and its resulting impact on the Company’s investment portfolio to investors until August 8, 2017, when Defendants discussed the departure of employees and the perceived negative impact it had upon the Company during the Company’s earnings call. ¶¶55-56. The shares of the Company fell $3.82 per share from August 8 to August 10, 2017, or approximately 30%, to close at $8.99 per share on August 10, 2017”.

What follows for anyone interested in the application of securities law is a very useful discussion of what a Plaintiff has to convince a court of to be successful; what specific claims were made in this case and why the court did not accept the arguments made by the plaintiffs.

It’s not easy reading for non-lawyers, but does offer numerous insights into how the securities laws operate in this area.

Facts Versus Explanations

Much of the case appears to have revolved less around whether CPTA provided false information or omitted material facts but whether the BDC had a duty to explain why the number of its investment professionals declined:

Plaintiffs have not established that it was necessary for the Company to explain the reason for the decline in the total number of investment professionals10 to avoid the statements being misleading. While the reason for a decline in the number of investment professionals might or might not be material to an investor (and might in any event be viewed positively or negatively), the Company did not make any disclosure regarding a reason for the change in the number of investment professionals. Therefore, no investor was misled into relying on an inaccurately stated reason.

Further Reading

There’s more to the case than we can summarize here, and we suggest anyone interested review the 21 page document.

Final Page

The bottom line, though, is that the :

“Defendants’ Motion to Dismiss Plaintiffs’ Amended Class Action Complaint is GRANTED, and Plaintiffs Amended Complaint is dismissed without prejudice;

2. If Plaintiffs choose to file a motion seeking to further amend their complaint in accordance with this ruling, they must do so within 30 days of the date of this Order;

3. Plaintiffs’ Motion to Strike Certain Exhibits to the Declaration of Bethany M. Rezek in Support of Defendants’ Motion…,” Doc. 60, is GRANTED as to Exhibits 4, 10 and 12 and DENIED as to Exhibit 11; and

4. If Plaintiffs do not file a Second Amended Complaint as allowed above, the Clerk is directed to close this case”.

We will know shortly if the Plaintiffs will continue this litigation or will fold their tents.


For shareholders, the potential end of the lawsuit will reduce legal costs, which are borne by the BDC, not by the investment advisor typically.

Pedagogic Intent

However, the BDC Reporter is bringing this document to the attention of the readers principally as a useful real-life primer on how BDCs have to contend and comply with securities laws when disclosing information.

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