SEC charges private equity queen Lynn Tilton with fraud
March 30, 2015 by Bloomberg News
Regulator says self-proclaimed billionaire misled investors about the value of risky pools of corporate loans
Lynn Tilton’s three-decade Wall Street career was dealt a blow by U.S. regulators, who accused the self-proclaimed billionaire of fraud for misleading investors about the value of risky pools of corporate loans.
Ms. Tilton and her firm Patriarch Partners reported the value of the underlying loans as unchanged even though many of the companies have made partial or no interest payments for years to funds clients invested in, the Securities and Exchange Commission said in a statement Monday. The SEC said Ms. Tilton and Patriarch collected $200 million of payments to which they weren’t entitled.
The SEC action could hurt a business empire the 55-year-old Tilton built by selling structured finance bonds before the market for such debt blew up in the 2008 financial crisis. Once known as the “Diva of Distressed,” Ms. Tilton gained notoriety over the years for her brash management style, once explaining that she only stripped and flipped men — not her companies.
The SEC’s action caps a five-year investigation that centered on three collateralized loan obligation funds known as Zohar I, II and III that raised more than $2.5 billion from investors. The funds held securities that Patriarch assembled and largely comprised of loans to companies controlled by Ms. Tilton’s firm.
‘VIGOROUS DEFENSE’
In a letter to investors last month, Patriarch said it disagreed with the SEC’s claims and had used a conservative methodology to value the loans.
“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,” Barbara Laidlaw, a Patriarch spokeswoman at Edelman, said in an e-mailed statement. “We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.”
On a conference call with reporters, SEC Enforcement Director Andrew Ceresney declined to comment on whether the case had been referred to criminal prosecutors. The SEC brought its case as an administrative action, as opposed to filing a civil lawsuit in federal court.
Ms. Tilton started Patriarch in 2000 and began creating the CLOs in 2003, after working at Goldman Sachs Group Inc. and Marc Lasry’s Amroc Investments.
What’s unique about Ms. Tilton’s deals is that she’s the owner of all the underlying companies borrowing money from her investors. Typically, different firms handle various aspects of these deals, such as underwriting, assembling the bonds and selling them. Ms. Tilton runs the businesses and at the same time is responsible for valuing them objectively.
PAGEANT JUDGES
“It’s like having a beauty pageant and the judges are the parents of the contestants,” said Lawrence Golub, chief executive officer of investment firm Golub Capital Partners. “It’s highly unusual to have a CLO that is concentrated in any one owner.”
Ms. Tilton has faced increasing scrutiny from investors and regulators since 2011 when Moody’s Investors Service cut the credit rating on one of her deals because of mounting defaults. Moody’s and Standard & Poor’s have since withdrawn some of their ratings of the Zohar deals because they hadn’t received enough information from Ms. Tilton about the underlying businesses.
The deals, named Zohar after the writings guiding the Jewish mystical tradition of Kabbalah, parceled distressed corporate loans into new securities, including some with AAA credit grades. Bond insurer MBIA Inc., which guaranteed some of the CLOs, lost a lawsuit against Patriarch in 2013 that claimed the asset manager had breached its contracts by failing to get part of a deal rated.
Patriarch owns more than 70 companies, including Dura Automotive, Spiegel Catalogs and MD Helicopters , according to its website. In an August 2013 interview with Bloomberg Businessweek, Ms. Tilton said her firm’s portfolio companies employ 120,000 people.
BRASH STYLE
Ms. Tilton was once poised to star in a reality television show called “Diva of Distressed,” according to Forbes. In the pilot episode, Ms. Tilton flew via private jet to a Maine paper mill that she had bought in hopes of turning wood at Old Town Fuel & Fiber into jet fuel. The venture proved unsuccessful when Patriarch closed the company in August, according to the Bangor Daily News.
Before the show was canceled in 2011, she used it to bolster her reputation for having a brash management style.
“It’s only men I strip and flip,” Ms. Tilton said in the pilot episode. “My companies I keep long-term and close to my heart.”
In a 2011 series of Forbes articles, the magazine contested her claims that she was a multibillionaire. Ms. Tilton doesn’t appear on the magazine’s world billionaire’s list.