Lynn Tilton, a self-styled “turnaround queen” of distressed debt, is facing fraud charges for allegedly hiding the poor performance of loan funds her firm managed, and collecting almost $200m in fees that it did not deserve.
The charges by the US Securities and Exchange Commission mark another twist in the flamboyant career of Ms Tilton, who built Patriarch Partners into a fund with more than $8bn in revenues and investments in brands including MD Helicopters, Rand McNally maps and Stila Cosmetics.
The former youth tennis star and Goldman Sachs investment banker also filmed a pilot for a reality show called Diva of Distressed.
The SEC accused Ms Tilton and Patriarch firms of misleading investors for years by using their own valuation methods for assets in three collateralised loan obligation funds, rather than accepted valuation standards, which helped them avoid reducing management fees they earned, the SEC said.
They allegedly violated their fiduciary duties and defrauded clients by telling investors that valuations were unchanged from the time the assets were acquired, although the underlying companies in those loans made only partial or no interest payments to what were known as the Zohar funds. The funds raised more than $2.5bn from investors.
Ms Tilton and Patriarch did not reduce the value of an asset until she decided to pull financial support for the distressed company, which meant the valuation was based on Ms Tilton’s “subjective assessment of the company’s future,” the SEC said.
The agency also accused Ms Tilton and Patriarch of making misstatements in quarterly financial statements.
“Instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200m in fees and other payments to which they were not entitled,” said Andrew Ceresney, director of SEC’s Enforcement Division, who added that two funds would have failed a test of their “overcollateralisation” ratio if the correct methodology had been used.
Ms Tilton and Patriarch plan to fight the charges, which will be heard in SEC administrative proceedings. They said that the funds’ noteholders are sophisticated investors who have extensive information to evaluate the performance of the funds and their underlying companies.
“We are disappointed that the SEC has chosen to bring an enforcement action that is ill founded and at odds with Patriarch’s investment strategy, which was consistently disclosed since the inception of the funds,” Patriarch said in a statement. “We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.”
The SEC has been investigating Ms Tilton for several years and her company has faced other legal actions regarding the loan assets. In 2013, bond insurer MBIA lost a lawsuit claiming that Patriarch had not obtained ratings for some of the CLOs.
Ms Tilton played tennis at Yale University before moving on to roles at Goldman Sachs and Merrill Lynch. She founded Patriarch in 2000, focusing on distressed investing and restructuring troubled companies. Its website says it has restructured more than 240 companies with combined revenues in excess of $100bn.
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