On March 30, 2015, the SEC filed administrative fraud charges against Lynn Tilton (“Tilton”); Patriarch Partners, LLC (“Patriarch”); Patriarch Partners VIII, LLC (“Patriarch VIII”); Patriarch Partners XIV, LLC (“Patriarch XIV”); and Patriarch Partners XV, LLC (“Patriarch XV”).
According to the SEC complaint, it is alleged that, since 2003, Respondents have defrauded three Collateralized Loan Obligation (“CLO”) funds they manage and these funds’ investors by providing false and misleading information, and engaging in a deceptive scheme, practice and course of business, relating to the values they reported for these funds’ assets.
A CLO fund is a securitization vehicle in which a special purpose entity, the issuer, raises capital through the issuance of secured notes and uses the proceeds to purchase a portfolio of commercial loans.
The three CLO funds, collectively known as the “Zohar Funds,” raised more than $2.5 billion from investors and used these investments to make loans to distressed companies. However, many of the distressed companies have performed poorly and have not made interest payments, or have made only partial payments, to the Funds over several years.
Despite the poor performance of many of the Funds’ assets, the SEC has alleged that 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. As a result, Tilton and her entities purportedly received almost $200 million in excess fees from the Funds.
The SEC’s administrative complaint can be found at http://www.sec.gov/litigation/admin/