Daniel Mudd, chief executive officer of Fortress Investment Group, has taken a leave of absence, effective immediately, amid allegations by the US Securities and Exchange Commission that he misled investors about the extent of the exposure to subprime debt when he headed up mortgage giant Fannie Mae. Fortress co-founder Randal Nardone will step in as interim CEO, the firm said in a statement released Wednesday.
“I have requested a leave of absence from my position as chief executive officer to ensure that any time or attention I need to focus on matters outside of Fortress will not affect the business or operations of the company,” Mudd said in a statement.
Last week, the SEC sued Mudd and other former executives at Fannie Mae for allegedly misleading investors in disclosures about the extent of the company’s exposure to subprime mortgage debt from 2006 to 2008. Mudd has denied the charges.
Fortress has acknowledged the SEC lawsuit and also said the organisation had been aware the SEC was going to charge Mudd since March, when the agency issue a “Wells Notice”, which alerts potential targets they may be sued.
Fortress said the investigation relates to Mudd’s alleged activities before he worked at Fortress. The listed firm, which was trading at around $3.38 early Monday, gave no indication in the filing of any management changes.
While some of Fortress’ private equity funds have struggled since the downturn in 2008, the firm has done well with credit-related funds raised and invested during the downturn, which paid off when the markets came back, according to an analyst who covers the firm. Specifically, the firm’s credit private equity funds generated distributable earnings of $24 million in the third quarter, up from $7 million in the same time period of last year, according to the firm’s third quarter earnings report.
Revenues were $39 million, up 95 percent from $20 million during the same time period last year, according to the report, driven by an $11 million increase in carried interest and an $8 million increase in management fees from called and raised capital in the funds.
The private equity funds have not done as well. The carrying value of the assets in the private equity funds declined by 6.4 percent in the third quarter, driven primarily by a decline in global equity prices, the firm said.
The private equity funds business’ distributable earnings also dropped 35 percent from the third quarter last year, when it hit $31 million. Decreases in revenues spurred the earnings losses, stemming from decreases in management fees from the expiration of some funds’ commitment periods, the firm said. Also, the firm reported a $3 million net carried interest reversal from a potential clawback.
Fortress' fifth fund, which collected $5 billion in 2007, was generating a 0.88x multiple and a negative 4.58 percent internal rate of return as of 30 June, according to performance information from the Oregon state treasury. Fund IV, which raised $2.5 billion in 2006, was producing a 0.92x return multiple and a negative 2.27 percent IRR, according to Oregon.
Fortress’ overall distributable earnings dropped to $43 million from $78 million in the third quarter last year, based on negative or flat performances by the firm’s hedge funds. The firm’s assets under management declined slightly to $43.6 billion from $44 billion as of 30 September, 2010.