SEC Files Fraud Charges Against Lynn Tilton, Firms


Federal regulators have filed civil fraud charges against prominent Wall Street executive Lynn Tilton and her investment firms. They are accused of concealing the poor performance of fund assets linked to loans to distressed companies.

The Securities and Exchange Commission announced the action Monday against Tilton and her Patriarch Partners group of investment firms based in New York. The SEC said Tilton and the firms have misled investors since 2003 and wrongly collected nearly $200 million in fees and other payments.

The firms denied the SEC’s allegations and said they will contest them. The case will be heard before an administrative law judge at the SEC.

The SEC action against Tilton represents an example of government regulators enforcing the fiduciary standard for investment advisers. The Obama administration recently proposed tougher restrictions on brokers who manage Americans’ retirement accounts, a change that would put brokers – who sell stocks, bonds, annuities and other investments – under the stricter fiduciary requirements for investment advisers.

The agency said Tilton violated her fiduciary duty to clients – the legal obligation of investment advisers and managers to put their clients’ financial interests first. Tilton did not disclose that she had a conflict of interest because she controlled the values that were set for three funds’ assets, the SEC said.

Tilton, 55, known for her outspoken manner, has often appeared as a commentator on CNBC.

Despite the assets’ poor performance, Tilton has “intentionally and consistently directed” that nearly all their values be reported in financial statements as unchanged from the time they were acquired by the funds, the SEC said in an administrative order.

The three funds are linked to bundled securities known as collateralized debt obligations, which in this case combine slices of loans to distressed companies with varying levels of risk.

In a combination of private equity and investment management, Tilton’s firms buy troubled companies with the idea of turning them around so they can pay off their debt, increase in value and be sold at a profit, and she also sells securities based on loans to the companies to investors. The SEC said the companies mostly performed worse than expected, but Tilton and the firms continued to report the values of the securities based on the loans as unchanged.

Tilton and the firms defrauded investors in the three funds “by providing false and misleading information, and engaging in a deceptive scheme, practice and course of business relating to the values they reported” for the funds’ assets, the SEC said in the order.

The SEC said that as CEO, Tilton certified the funds’ financial statements, saying they conformed to generally accepted accounting principles, when in fact they did not.

Patriarch Partners denied the allegations, calling the SEC action “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 Partners said in a statement.

The investors in the three funds are sophisticated and “have extensive information to evaluate the cash-flow performance of the funds and the performance of the underlying companies,” the statement said.

The Justice Department has investigated whether Tilton played by the rules in her hiring of a former Army officer who allegedly steered millions of dollars in contracts to one of the companies she acquired, MD Helicopters, while they negotiated his future employment. The Associated Press reported in March 2014 that Tilton and Bert Vergez, a retired colonel who ran an Army acquisition office in Huntsville, Alabama, were in unusually close contact for more than a year before Vergez retired from military service in late 2012. Three months later, he was working for Tilton.

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