Tilton, Patriarch Sued By Two Investors For CLO-related Losses

Oct 6 2015 | 7:14pm ET

Some of Lynn Tilton’s investors have seemingly lost patience with a long-running U.S. regulatory investigation into two CLO funds offered through Tilton’s private equity company, Patriarch Partners.

Tilton and Patriarch were sued on October 5 by two German investors who claim the company’s mismanagement and misrepresentations caused them to lose more than $45 million.

Norddeutsche Landesbank Girozentrale and its Hannover Funding Company affiliate have accused Tilton and Patriarch of tricking them into investing $135 million into the two CLO funds and not disclosing an intent to manage the funds “for their own benefit and profit.”

Patriarch has vigorously denied the allegations, according to a Reuters report citing a spokesperson for the company. 

The lawsuit is related to the SEC investigation currently under way into Patriarch’s handling of poor performance in the CLO funds, and whether the company hid the poor numbers while collecting nearly $200 million of fees. Tilton and Patriarch have likewise denied the SEC’s allegations. 

The SEC proceedings have been delayed while a federal court decides whether the case must go through the SEC’s controversial in-house administrative proceedings process, which has been roundly criticized by those under investigation as unconstitutional and unfair to defendants.

Originally designed to speed up enforcement actions, SEC administrative proceedings take place before an SEC-appointed administrative law judge, raising questions of conflict of interest and constitutionality, and do not allow depositions and rules of evidence generally found in regular courts.

The Patriarch CLO funds in question raised more than $2.5 billion by selling securities and using the proceeds to acquire commercial debt, essentially making them large pools of corporate loans made or purchased with investor funds. According to the Norddeutsche lawsuit, such baskets require careful management and attention, but in the case of the Patriarch CLOs, they were “in fact, poorly run and incredibly risky private equity ventures.”

Moreover, both the SEC action and the Norddeutsche lawsuit contend Patriarch concealed defaults within the CLO pools in order to continue collecting fees, carrying the obligations at full value despite some of the loans not performing.

The new case is Norddeutsche Landesbank Girozentrale et al v. Tilton et al, New York State Supreme Court, No. 651695/2015. The SEC case remains stayed by the U.S. Court of Appeals for the Second Circuit in Manhattan pending a ruling in federal court on Tilton's challenge of the in-house venue.

Tilton 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. According to its website, Patriarch currently manages investments in more than 75 firms across 14 sectors. 


In Depth

Q&A: Portfolio Advisors' Brian Murphy On The Advantages of A Private Markets Platform

Jan 2 2018 | 11:05am ET

Most private markets firms reference their platforms as a source of competitive...

Lifestyle

CFA Institute To Add Computer Science To Exam Curriculum

May 24 2017 | 9:25pm ET

Starting in 2019, financial industry executives sitting for the coveted Chartered...

Guest Contributor

Steinbrugge: The Top Hedge Fund Industry Trends for 2018

Jan 2 2018 | 12:22pm ET

Each year, Don Steinbrugge’s Agecroft Partners compiles the insights gained...

 

FINalternatives Trending

From the current issue of