Lynn Tilton, the owner of the financial firm Patriarch Partners LLC, is suing the U.S. Securities and Exchange Commission. She wants the regulator to stop going after her for alleged financial fraud. Tilton claims that the agency did not abide by the U.S. Constitution when it chose to pursue its case against her via its own administrative proceeding rather than federal court.
The SEC is charging Tilton and her firm with securities fraud. The Commission contends that she concealed the poor performance of the assets that were underlying three CLO (collateralized loan obligation) funds, known as the Zohar Funds. The agency has been probing the Zohar I, II, and III funds for years. They contain securities put together by Patriarch and are made up mostly of loans to companies that the financial firm controlled.
Tilton and Patriarch had raised over $2.5 billion for the funds. The regulator said that because they concealed the low performances, the firm and Tilton were able to collect close to $200 million of fees they shouldn’t have received. The SEC said that “major conflict of interest” was a factor.
The regulator contends that Tilton and Patriarch Partners reported that the underlying loans’ value hadn’t changed even though a lot of the companies made only partial or no interest payments at all for years to the funds where clients had put their money. Following the charges, Patriarch issued a letter to investors disputing the agency’s claims.
Now, Tilton is claiming that the SEC’s administrative proceedings are a constitutional violation, because even though administrative law judges are considered executive branch officers they garner job protections that do not allow the president to take them out of office. Critics of these proceedings have expressed concern that claimants may be at a disadvantage because of the limited discovery, depositions aren’t allowed, and there are no juries. The judges are paid by the SEC.
Tilton’s Patriarch invests in beleaguered companies at prices that are low. She has helped turned around companies because of these investments. Bloomberg says that she owns all the underlying companies borrowing funds from her investors. This is not typical, because usually multiple firms deal with the different aspects of these types of deals, whether it’s putting together the bonds, selling them, and underwriting. Patriarch is the owner of over 70 companies.
Tilton has been under close examination since 2011 when Moody’s Investors Services (MCO) reduced the credit rating on a deal of hers due to an increasing amount of defaults. The credit rating agency, along with fellow credit rater Standard & Poor’s, have since withdrawn a number of their ratings from the Zohar deals because Tilton didn’t get them enough information about the underlying businesses.
Financier Lynn Tilton sues SEC after it charges her with fraud, Reuters, April 1, 2015
Diva of Distressed’ Tilton Accused of Defrauding Investors, Bloomberg, March 30, 2015
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