Lynn Tilton Wins SEC Fraud Trial She Worked Hard to AvoidBy and
Patriarch Partners founder called agency proceeding unfair
Regulator sued Tilton claiming she defrauded investors
Lynn Tilton, whose aggressive management style made her a success on male-dominated Wall Street, won a U.S. Securities and Exchange Commission trial she’d spent months fighting to avoid.
SEC administrative law judge Carol Fox Foelak ruled in favor of Tilton over allegations that she and her firm, Patriarch Partners LLC, bilked investors out of more than $200 million.
“It is concluded that the violations” alleged by the SEC are “unproven,” Foelak wrote in her ruling issued Wednesday. “Thus, the proceeding will be dismissed.”
The decision follows a three-week trial that ended last November. Tilton, who repeatedly argued that the SEC’s internal legal process is unfair to defendants, went all the way to the U.S. Supreme Court in her unsuccessful efforts to have the case heard in federal court, rather than before an SEC administrative judge.
In a finance career that’s spanned more than three decades, Tilton has gained notoriety for her unique spin on the common Wall Street practice of buying failing companies and then trying to turn them around. What set Tilton apart is that she owned the struggling businesses, while also controlling investment funds that lent them money. She did this by raising cash from clients and issuing securitized debt that was largely backed by loans to her portfolio companies.
The SEC sued Tilton in March 2015, alleging she defrauded her investors by telling them the loans were sound even though the companies had made partial or no interest payments for years. The agency sought the return of more than $200 million in fees that Patriarch collected for managing clients’ money.
“After nearly eight years of false and reputation-damaging allegations by the SEC, justice has finally been delivered,” Tilton said in an emailed statement.
In a 57-page decision, Foelak said the SEC failed to prove that Tilton overvalued loans to her portfolio companies in order to charge her investment clients higher management fees. The judge found that Tilton didn’t conceal material information, including the interest rate and principal on the loans, and the amount of interest that was actually being paid.
“We said all along that Lynn Tilton was innocent of these charges, had been falsely accused and we’d prove it at trial,” Tilton’s attorney, Randy Mastro, said by telephone after the decision was released. “That’s exactly what we did. She’s an innocent person who never should have faced these charges. Now she has been vindicated and justice has been done, thank God.”
Judy Burns, an SEC spokeswoman, declined to comment on the decision.
Tilton argued throughout the SEC’s investigation that her investors gave her discretion to change loan terms or forgive missed payments on the high-interest loans in order to boost the value of the companies. In her complaint against the SEC’s administrative law process, she claimed that the manner in which in-house judges are selected is unconstitutional.
The SEC, which spent five years investigating Tilton, disputed her claims of misconduct and defended the in-house proceeding as fair and efficient. Last year, the agency added new rules giving defendants as long as 10 months to prepare for trial and allowing for some pretrial depositions.
Tilton had nine months to prepare for the hearing, plus the additional time it took for her to challenge the case in federal court. She had a 14-day hearing, during which her lawyers called their own witnesses and cross-examined the SEC’s.
The case is In the Matter of Lynn Tilton, 3-16462, U.S. Securities and Exchange Commission (Manhattan).
— With assistance by Chris Dolmetsch