Diva of Distressed Tilton Loses Bid to Halt SEC Proceedings

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Lynn Tilton, the so-called Diva of Distressed, lost a bid to halt a U.S. Securities and Exchange Commission in-house disciplinary proceeding against her after a federal judge said she was powerless to do so.

Tilton must go through the SEC’s administrative process before bringing any challenge to the handling of her case or its outcome, U.S. District Judge Ronnie Abrams in Manhattan said Tuesday. Until then, the courts can’t entertain Tilton’s claim that the process is unconstitutional.

The SEC accused Tilton and her firm, Patriarch Partners LLC, of misleading investors about the value of risky pools of corporate loans. Tilton sued the agency in April, claiming its pursuit of fraud claims against her and her firm violates the Constitution.

The SEC’s use of administrative proceedings for enforcement actions has drawn increasing scrutiny from securities lawyers in recent months. Critics of the process say it’s unfair because the administrative law judges are hired by the SEC, and defendants don’t have the same opportunity to uncover evidence in their favor as they would in federal court.

An Atlanta federal judge ruled this month that the SEC probably overstepped its constitutional authority by tapping an in-house administrative judge to preside over an insider-trading case.

Two investors in funds managed by Tilton’s firm sued her in New York state court in May seeking at least $44 million, saying that it’s obvious that most of the information they got from Patriarch Partners is misleading. Tilton said the suit merely piggybacks on the SEC allegations.

The SEC allegations threaten to tarnish the three-decade career on Wall Street of the self-professed billionaire. Before the single mom became known as the the Diva of Distressed through a short-lived reality television pilot on the Sundance Channel, Tilton was a nationally ranked teenage tennis player in Teaneck, New Jersey, a banker for Goldman Sachs Group Inc. and a Merrill Lynch & Co. distressed-debt trader.

“We are disappointed with Judge Abrams’s decision finding that she lacked jurisdiction to hear our serious constitutional claims,” Barbara Laidlaw, a spokeswoman for Patriarch Partners, said in an e-mail. “Judge Abrams’s decision departs from recent decisions by other federal judges and, accordingly, we intend to seek expedited appellate review.”

The case is Tilton v. SEC, 15-cv-2472, U.S. District Court, Southern District of New York (Manhattan).

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