Tilton, Patriarch Win Full Dismissal Of SEC Charges

Sep 27 2017 | 6:27pm ET

An administrative law judge for the U.S. Securities and Exchange Commission has dismissed allegations of fraud against private equity maven Lynn Tilton and her company Patriarch Partners.

In finding for Tilton, SEC administrative law judge Carol Fox Foelak concluded that the violations alleged by the regulator “are unproven” and thus “the proceeding will be dismissed.”

First filed in March 2015, the SEC action accused 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. The Commission sought the return of some $200 million in fees it said were improperly collected by Patriarch

Tilton and Patriarch denied the allegations, saying disclosures were sufficient and that their investment documents clearly gave them discretion to change loan terms and payment schedules, particularly if done to support or improve the borrower’s overall health. 

Foelak agreed, noting in her 57-page ruling that “While respondents did not maximize the ease of finding it, they also did not conceal – omit to state – material information,” and characterizing the argument that Tilton and Patriarch were embarked on an effort to “actively conceal” information about interest payments from the CLOs as “unpersuasive.”

The victory is undoubtedly extra sweet for Tilton, given that she vigorously contested the use of SEC administrative law judges in the first place, declaring them essentially unconstitutional. Tilton went all the way to the U.S. Supreme Court with the argument, saying the case belonged in a Federal court instead of before a judge effectively appointed by the same Commission suing her. TIlton argued such cases are procedurally prejudicial against defendants and that SEC administrative judges are in fact “inferior officers” under the Constitution and thus must be named in accordance with the Appointments clause. 

In May, the Supreme Court refused to hear Tilton’s case, leaving in place a U.S. Second Circuit decision that dismissed her lawsuit on jurisdictional grounds. 

The SEC reportedly spent five years investigating the Zohar matter. The case is In the Matter of Lynn Tilton, 3-16462, U.S. Securities and Exchange Commission (Manhattan).

Tilton, dubbed the “Diva of Distressed, became one of Wall Street’s best-known turnaround specialists in the years since Patriarch was founded in 2000, restructuring more than 240 companies, according to the firm’s web site. 

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