The US Securities and Exchange Commission (SEC) has charged Patriarch Partners, the private debt firm led by self-proclaimed “turnaround queen” Lynn Tilton, with defrauding investors in three collateralized loan obligation (CLO) funds by providing false and misleading information about loan asset performance, according to an SEC order issued Monday.
The order describes Patriarch’s valuation process as a “deceptive scheme” and states that Tilton herself is “responsible for all these violations.”
Zohar I, II and III have raised more than $2.5 billion since 2003 to make loans to distressed mid-market companies. However, many of the companies performed poorly and did not make interest payments or only made partial payments to the funds over several years.
Despite this poor performance, the SEC alleges 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.”
Patriarch never disclosed Tilton’s discretionary valuation approach to investors, the SEC alleges. The firm also failed to conduct a “required impairment analysis” on the assets of the funds despite disclosures to investors stating that such analysis had occurred. They also falsely stated that assets of the Zohar funds were reported at fair value and Tilton falsely certified that the financial statements were compliant with the Generally Accepted Accounting Principles (GAAP).
“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firm have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said director of the SEC 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.”
Patriarch, however, is denying these claims. “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,” said the firm in an email to pfm. “We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.”
Last month, Patriarch informed investors that the firm was under SEC investigation. At the time, Patriarch stated that it “employed what it believes to be a conservative methodology” for valuing its loans because it recognizes neither gains nor losses.
A public hearing on the charges will be held within the next two months, according to the order.