Tilton, Patriarch Accused by SEC of Misleading Investors

Mar 31 2015 | 2:36pm ET

The U.S. Securities and Exchange Commission has accused billionaire private equity maven Lynn Tilton and her company, Patriarch Partners, of misleading investors about the performance of funds in which they were invested.

The charges stem from disclosures surrounding three collateralized loan obligation funds managed by Patriarch, which makes investments in distressed companies. The CLOs, which ultimately contained a combined $2.5 billion, made loans to companies that Tilton and her staff planned to return to profitability. 

However, according to the SEC, Tilton was not always forthcoming about the performance of those companies in paying off the loans. Instead, Patriarch “intentionally and consistently directed that nearly all valuations…be reported as unchanged from their valuations at the time the assets were originated,” according to the complaint. 

In other words, despite some of the loans not performing, Tilton and Patriarch allegedly carried the CLO positions as fully valued, violating a duty to report the deterioration of the businesses within the funds despite many of them making no, or only partial, interest payments for several years.

“Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them,” said SEC Enforcement Director Andrew Ceresney in the complaint.

Patriarch and Tilton thus improperly collected almost $200 million in fees from the structures to which they were not entitled, Ceresney added. 

Tilton and Patriarch disclosed the SEC’s investigation in a letter to investors in February. Tilton, who was to star in a reality television show called “Diva of Distressed” until the idea was canceled in 2011, founded Patriarch Partners in 2000 after more than a decade on Wall Street. The company and its affiliates have become one of the best-known turnaround specialists, restructuring more than 240 companies.

In response to the SEC accusations, Tilton has vowed to fight the charges and “set the record straight”, according to a post on social media. Patriarch points out that as a turnaround shop, the company necessarily invests in distressed firms where bumps in the road are to be expected. 

Moreover, Tilton has pointed out that none of the investors – which are described as large and sophisticated – have complained to the firm about its practices, and all were adequately informed about Patriarch’s investment strategy.

The SEC has brought the case against Tilton and Patriarch in its in-house system of administrative proceedings that take place before SEC-appointed administrative law judges, instead of going to district court. It is a controversial practice that has gained momentum as part of the Dodd-Frank Financial Reform Act.

Although generally faster, the process has been criticized as unfair to defendants in part because such cases do not usually involve depositions, interrogatories, juries or rules of evidence, which can put defense teams at a disadvantage. It has also been accused of being unconstitutional, since the SEC itself chooses the judges. 

Patriarch Partners reported assets under management of about $5.3 billion as of the end of February, according to regulatory filings. 

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