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SEC loses Tilton fraud case

The US regulator failed to prove allegations Lynn Tilton defrauded investors in three of her distressed debt funds.

The Securities and Exchange Commission has lost its fraud case against the chief executive of Patriarch Partners.

The judge ruled the SEC’s allegations that Lynn Tilton defrauded investors were “unproven” and dismissed the case, according to an administrative proceeding, initial decision published on the SEC website on September 27.

The agency began proceedings against Tilton in March 2015, alleging she had misstated the fair value of underlying loans in three funds she managed – Zohar CDO 2003-1 Ltd, Zohar II 2005-1 Ltd and Zohar III – which contain loans in distressed companies.

The SEC alleged that Tilton gave investors improper financial statements, which also enabled her to gain an extra $200 million in unwarranted fees.

The Commission initially sought a $200 million penalty against Ms. Tilton. This was cut by $45 million in June following a Supreme Court decision that disgorgement is subject to a five-year statute of limitation. 

Tilton, who became known as the “Diva of Distress,” had attempted to avoid being tried through an administrative hearing in front of an SEC administrative law judge, looking to be heard in federal court instead. The first attempt, in April 2015, was rejected by three appeals courts.

The second attempt was in September 2016. Tilton dropped that action, which was “voluntarily dismissed” by a New York district court.

The SEC has 21 days to appeal the latest ruling.