Risk & Compliance

‘Diva of Distressed’ Accused of Defrauding Investors

Lynn Tilton's Patriarch Partners hid the poor performance of some collateralized loan obligation funds, the SEC charges.
Matthew HellerMarch 30, 2015

Flamboyant financier Lynn Tilton defrauded investors in three collateralized loan obligation (CLO) funds of $200 million in management fees and other payments by concealing the poor performance of the funds’ assets, the U.S. Securities and Exchange Commission said Monday.

Tilton, who heads the private equity firm Patriarch Partners, specializes in buying troubled companies on the cheap and turning them around. She starred in her own reality television show, called “The Diva of Distressed.”

Since 2003, the CLO funds, known as the Zohar Funds, have raised around $2.5 billion from investors to finance loans to distressed companies.

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According to an SEC administrative complaint, however, Tilton did not inform clients when the value of those loans declined and was responsible for misstatements in the funds’ quarterly financial statements.

“Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” Andrew J. Ceresney, director of the SEC’s Enforcement Division, said in a news release.

Zohar Fund investors were paid based on cash flows and other proceeds from the loans and Tilton and Patriarch pocketed a management fee of 1% of the amount of assets every quarter.

According to the SEC, the CLO offering documents spelled out specific methodologies that Patriach would use to value each loan asset in monthly reports, but Tilton “intentionally and consistently directed that nearly all valuations of these assets be reported as unchanged from their valuations at the time the assets were originated.”

“Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels,” Ceresney said.

As The New York Times notes, the financier “has embraced media attention and is known for donning flamboyant outfits, including her trademark five-inch heels.” On the Patriarch website, she claims to have provided operational and strategic expertise to more than 240 companies, representing more than $100 billion in combined revenues.

“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,” Patriarch said in a news release.