March 31, 2017 / 6:50 PM / in 2 years

Third Avenue in $14.25 million settlement over junk bond fund collapse

NEW YORK (Reuters) - Third Avenue Management and its founder Martin Whitman have reached a $14.25 million settlement of a lawsuit by investors who accused the well-known value investment firm of mismanaging a junk bond mutual fund that collapsed in December 2015.

The preliminary all-cash settlement was filed on Friday with the U.S. District Court in Manhattan, and requires a judge’s approval.

It resolves charges that the defendants failed to ensure that the Third Avenue Focused Credit fund had enough liquidity, and misled investors about the fund’s risks and ability to value securities properly.

The collapse of Focused Credit, which is being liquidated, tarnished the legacy of Whitman, 92, who chaired the fund, after having developed a strong reputation on Wall Street for investing in low-priced and “distressed” stocks.

Other defendants included Third Avenue’s former chief executive, David Barse, and several of the firm’s officers and trustees. All denied wrongdoing in agreeing to settle.

Daniel Gagnier, a spokesman for Third Avenue, declined to comment. Its majority owner Affiliated Managers Group Inc previously set aside money to cover the settlement.

Based in Manhattan, Third Avenue closed Focused Credit on Dec. 9, 2015 and halted redemptions after investors flooded it with withdrawal requests, which it said it could not meet by selling assets at what it called “rational” prices.

Focused Credit had posted a nearly 30 percent loss in 2015 prior to the closure, and had lost nearly three-quarters of the $2.97 billion of assets it held in late 2014.

The plaintiffs are led by an International Brotherhood of Electrical Workers pension plan in Michigan.

In a court filing, their lawyers said Third Avenue’s finances had become a “serious concern” following an “exodus” of client money, creating a risk that its insurers would be unable to cover a higher payout even if the plaintiffs won at trial.

Third Avenue has roughly $4.3 billion of assets under management, down from about $8 billion 1-1/2 years ago.

Robbins Geller Rudman & Dowd, which represents the plaintiffs, plans to seek fees equal to 10 percent of the settlement fund, court papers show.

The case is In re: Third Avenue Management LLC Securities Litigation, U.S. District Court, Southern District of New York, No. 16-02758.

Reporting by Jonathan Stempel in New York; Additional reporting by Tim McLaughlin in Boston; Editing by Cynthia Osterman

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