A securities class action suit was filed against a management and investment firm following allegations that it violated certain federal securities laws by including false and misleading information on its prospectuses and registration statements.
The lawsuit against Third Avenue Management LLC and select officers was filed in the U.S. District Court for the Central District of California on behalf of investors who purchased shares in the fixed income mutual fund during the class period between March 1, 2013 to Dec. 10, 2015, or in connection with its registration statements or prospectuses, according to a press release. The class action complaint claims that Third Avenue Trust, Third Avenue Management LLC and M.J. Whitman LLC violated the Securities Act of 1933.
Third Avenue’s liquidity expectations
Third Avenue is an open-ended management investment firm. The company is composed of several investment funds that work to recognize long-term returns by investing in various credit instruments. An important feature of mutual funds such as Third Avenue is that they allow investors to redeem their purchased shares on any day that the exchange they are traded on is open. Because of this key aspect, these funds must constantly have the liquidity to meet these shareholder redemption requirements.
“Mutual funds must have the liquidity to meet shareholder redemption requirements.”
Since August 2009, Third Avenue Focused Credit Fund, one of the company’s investment funds, assured investors they would have access to higher yielding distressed debt investments and claimed to maintain the liquidity and share redemption features typically associated with a mutual fund. Its prospectus and registration statement explained that investors could redeem their shares on any day that the New York Stock Exchange was open. In addition, the statements established a timeline for when investors would receive payments for fund share redemption – within one business day, typically, but “not later than seven calendar days, after receipt of a redemption request.” In addition, the fund assured investors that only a small portion of its investments were in illiquid assets – never more than the 15 percent threshold set by the Securities and Exchange Commission.
Third Avenue’s issues come to light in late 2015
The class action filing alleged that these statements to investors were false and misleading. The lawsuit claims that the defendants took on large quantities of illiquid assets as it grew in size from 2012 to 2014. The class action suit goes on to allege that during this period, there was no market for many of the fund’s acquired assets, which opened it up to risks of investment losses and a suppression of shareholder abilities to redeem their shares as expected.
Third Avenue eventually froze investor withdrawals.On Dec. 10, 2015, Third Avenue Management announced that it decided to freeze all investor withdrawals and move the fund’s assets into a liquidating trust. It noted that it may take a year or more for investors with money invested in the fund to get it back. Another letter, released on Dec. 12, 2015, disclosed that the company had come to an agreement with the SEC that mandated Third Avenue to transfer assets back into the Focused Credit Fund to provide investors with more transparency. The fund informed investors that initial shareholder redemption would total a mere 9 percent of its remaining capital.
As Third Avenue’s issues with liquidity, high-risk assets and redemption were made public, its securities were negatively affected. The class action filing noted that on Dec. 10, 2015, Third Avenue Focused Credit Fund Institutional Class shares closed at $6.46 per share and Third Avenue Focused Credit Fund Investor Class closed at $6.48 per share. These close prices were more than 45 percent lower than the fund’s class period highs.
For more information on this case or other class action litigations, please contact Adam Foulke at 203-987-4949 or info@battea.com.