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Capitala Finance Corp.

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Case Summary

Company Name
Capitala Finance Corp.
Stock Symbol
Class Period
January 4, 2016 to August 7, 2017
Motion Deadline
February 26, 2018
Central District of California

The complaint charges Capitala Finance Corp. (“Capitala”) and certain of its officers with violations of the Securities Exchange Act of 1934.  Capitala is a business development company that invests primarily in first and second liens, subordinated debt, and equity securities issued by lower and traditional middle-market companies.  Capitala Investment Advisors, LLC (“Capitala Advisors”) manages the Company’s investment activities.  Pursuant to an Investment Advisory Agreement, the Company pays Capitala Advisors fees for its investment advisory and management services consisting of two components – a base management fee and incentive fees.  On January 4, 2016, Capitala announced the waiver of Capitala Advisor’s incentive fees.

The complaint alleges that throughout the Class Period, defendants made false and misleading statements and/or failed to disclose adverse information regarding the Company’s business and prospects.  Specifically, the complaint alleges defendants failed to disclose that Capitala Advisors had been losing professional talent in both underwriting and portfolio management due to the waiving of its incentive fees and that this loss of talent was negatively impacting the quality of the Company’s investment portfolio.  As a result of defendants’ false statements and/or omissions during the Class Period, Capitala securities traded at artificially inflated prices, with its stock price reaching a high of more than $15 per share.

On August 7, 2017, after the market closed, Capitala revealed that six of its investments were on non-accrual status – twice as many as the previous quarter.  The next day, August 8, 2017, the Company’s CEO, Joseph B. Alala III, disclosed in a conference call that Capitala Advisors had been losing professional talent due to the waiving of the incentive fees and acknowledged that the rising number of non-accrual investments was connected to the loss in underwriting and portfolio management talent.  On this news, the price of Capitala shares fell $3.82 per share, or approximately 30%, over the next three trading day to close at $8.99 per share on August 10, 2017.

Class Period: January 4, 2016 - August 7, 2017
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