The Securities and Exchange Commission charged Lynn Tilton and her Patriarch Partners firm with fraud on Monday, claiming the Bronx-born business magnet and her company of hiding the poor performance of loan assets in three collateralized loan obligation funds.
Tilton, who earlier in her career worked as an investment banker at Morgan Stanley and Goldman Sachs, founded her investment firm, Patriarch Partners, in 2000 with a strategy based on managing and monetizing distressed portfolios of financial institutions.
But the SEC claims Tilton and Patriarch have breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for three CLO funds collectively known as the Zohar funds.
“Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” Andrew J. Ceresney, director of the SEC’s enforcement division, said Monday. More than $2.5 billion has been raised from investors, according to the regulator.
Tilton’s alleged strategy for the three funds at issue has been to improve the operations of the distressed portfolio companies so they can pay off their debt, increase in value, and eventually be sold for a profit. But the SEC claims Tilton and her company have not followed the required methodology for valuing these loan assets.
“Tilton and her firms have maintained their control over the funds and preserved their management fees by not lowering an asset’s category until she decides to cease financial support of the distressed company. Thus the valuation of an asset simply reflects Tilton’s subjective assessment of the company’s future,” according to the regulator.
Additionally, the SEC claims Tilton and Patriarch failed to conduct a required analysis on the assets of the Zohar funds, despite stating they had, as well as falsely stating that assets of the Zohar funds were reported at fair value. Tilton also repeatedly and falsely certified that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP).
The case will be scheduled for a public hearing before an administrative law judge.