SEC slams Tilton, Patriarch with fraud allegations: UPDATED

The SEC accused Lynn Tilton and her firm Patriarch Partners of fraud Monday, alleging the firm and its outspoken founder misled investors by assigning false valuations to loans held by three of its CLO funds.

The SEC alleges that Tilton, Patriarch’s CEO and the sole principal of the funds named in the suit, disregarded valuation methodologies outlined in the funds’ governing documents. The firm kept valuations of those assets high, thereby entitling Patriarch to approximately $200 million of management fees and distributions that would have been lost had the quality of those loans been properly assessed.

UPDATE: ”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 said in a March 30 statement.

The CLO vehicles, known collectively as the Zohar Funds, raised $2.5 billion from investors for loans to distressed companies. The SEC’s Enforcement Division named Tilton, Patriarch Partners LLC, Patriarch Partners VIII LLC,Patriarch Partners XIV LLC and Patriarch Partners XV LLC in its allegations.

“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said the SEC’s Director of its Enforcement Division Andrew Ceresney, in a statement. “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.”

The SEC ordered the firm to a public hearing within the next 60 days to address the allegations.

Tilton, a well-known executive who developed a brash reputation for her opulent lifestyle and public persona, is said to be worth more than $1 billion.

Photo courtesy of Reuters/Mike Segar