U.S. regulators took aim at the flamboyant financier Lynn Tilton and her advisory business on Monday, saying she breached her fiduciary duty to investors by hiding the poor performance of loans underlying three collateralized loan obligations.
The Securities and Exchange Commission said that Tilton and private equity business Patriarch Partners were able to collect almost $200 million in fees by failing to properly value the assets in the funds through the methodology described to investors.
Tilton, who has referred to herself in the past as the "turnaround queen" because of her penchant for buying distressed assets and rejuvenating them, plans to fight the SEC's charges in the agency's in-house court.
"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," a spokeswoman for Patriarch Partners said Monday.
"We look forward to the opportunity to vigorously defend ourselves against the SEC's allegations," the spokeswoman added.
According to the SEC's lawsuit, Tilton, 55, and three of her Patriarch Partners investment fund companies mislead investors in three collateralized debt obligation funds known as the "Zohar Funds."
The SEC said the Zohar funds raised $2.5 billion from investors and used the money to make loans to distressed companies. The companies, however, failed to perform well and did not make some or all of the interest payments back to the funds over several years.
The SEC said that despite this, 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."
Had the proper valuation methodology been used, the SEC added, then valuation ratio tests would have failed and Tilton's compensation would have been reduced by about $200 million.
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