The Securities and Exchange Commission has charged Lynn Tilton and her Patriarch Partners firms with fraud.
The SEC alleged Tilton and her Patriarch firms breached their fiduciary duties and defrauded clients by failing to value assets that reflect their declining value. The assets were in collateralized loan obligation funds, portfolios that comprise of loans to distressed companies. The SEC also charged that in misleading investors to believe that objective valuation analyses were being performed, Tilton and her firms allegedly have avoided significantly reduced management fees.
Andrew J. Ceresney, director of the SEC’s enforcement division, said, “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.” He said Tilton and her firm “collected almost $200 million in fees and other payments to which they were not entitled.”
The three CLO funds are collectively known as the Zohar funds, which have raised more than $2.5 billion from investors. The strategy for the Zohar funds 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, according to the SEC.
The SEC’s order has set the matter for a public hearing before an administrative law judge. The hearing hasn’t yet been scheduled.
A spokeswoman for Patriarch Partners said, “We are disappointed that the SEC has chosen to bring an enforcement action that is ill founded and at odds with Patriarch’s investment strategy, which was consistently disclosed since the inception of the funds. We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.
“Patriarch is focused on the restructure and rebuild of deeply distressed American companies and we do this through a unique [CLO] structure that explicitly provides for the flexibility to turnaround distressed companies and create value for the funds and its noteholders.”
The spokewoman added the Zohar noteholders are “sophisticated investors that have extensive information to evaluate the cash flow performance of the funds and the performance of the underlying companies.”
Patriarch was founded in 2000. Its current portfolio firms include beauty firms Dana Classic Fragrances Inc., Jane Cosmetics and Stila Cosmetics. The portfolio also includes textiles firm Galey & Lord; outdoor performance wear firm 180s; catalogue retailer Spiegel/Newport News/Shape FX, and promotional apparel and uniform firm Hartwell Apparel.