U.S. Appeals Court Issues Stay in SEC Administrative Case Against Lynne Tilton

Sep 18 2015 | 3:20pm ET

A New York appeals court has put a temporary stop to the administrative securities fraud lawsuit against private equity maven Lynne Tilton and her firm Patriarch Partners.

The U.S. Court of Appeals for the Second Circuit in Manhattan issued the stay on the case pending a challenge by Tilton against the use of an internal SEC administrative law judge in their case against her. The SEC has increasingly used such in-house judges for enforcement actions instead of federal district courts, a practice decried by opponents as unconstitutional because it violates the appointments clause of the U.S. Constitution, not to mention biased since the plaintiff – in this case the SEC – also employs the judge. 

Initially designed to speed up resolution of enforcement and other proceedings, the process has since 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. 

The administrative trial against Tilton and Patriarch is scheduled to commence on October 13, 2015. The case is one of several currently challenging the constitutionality of SEC administrative law judges.

Filed in March, the SEC action accuses Tilton and Patriarch of misleading investors about the performance of three CLO funds in which they were invested. 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, 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.

Tilton and her company have become one of Wall Street’s best-known turnaround specialists since Patriarch was founded in 2000, restructuring more than 240 companies, according to Patriarch’s web site. 

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