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Newhampshire News Online

SEC charges investment adviser Lynn Tilton with fraud

SEC charges investment adviser Lynn Tilton with fraud

A onetime young tennis star-turned-wealthy-investment adviser and her financial firms were charged with fraud Monday for allegedly misleading investors and improperly collecting nearly $200 million in fees. Lynn Tilton, 55, and her New York-based Patriarch Partners companies hid the poor performance of loan assets in three collateralized loan obligation funds they manage, the Securities and Exchange Commission alleged in an order that launched an administrative cease-and-desist proceeding.635633171008599483-AP110610013226

Tilton and the companies defrauded clients by failing to value assets using the methodology they outlined to investors in offering documents for the investments collectively known as the Zohar Funds, which have portfolios of loans to distressed firms, the SEC charged. The funds have raised more than $2.5 billion from investors, according to the SEC. They raised capital by issuing secured notes and using the proceeds to purchase a portfolio of collateral typically comprised of commercial loans.

Investors were led to believe that Tilton and her companies made objective valuations of the loan assets. However, nearly all the valuations were reported to investors as unchanged from the time the loan assets were acquired, even though many of the companies had made partial or no interest payments to the Zohar Funds for several years, the SEC charged. “As a result … management fees and other payments to Tilton and her entities would have been reduced by almost $200 million, and investors would have gained more control over the funds’ activities, among other consequences,” the 13-page SEC filing alleged. “By applying her own discretion rather than the valuation methodology set forth in the governing documents, Tilton has avoided these consequences and taken excessive fees from the funds.”

Andrew Ceresney, the SEC’s director of enforcement, said 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.” The indenture for each Zohar Fund collateralized debt obligation included numeric tests that had to be met each month. Failure to meet the test standards would give investors increased rights to control the funds or remove the Patriarch collateral manager, as well as eliminate the funds’ obligation to pay Patriarch’s quarterly fee, the SEC filing charged.