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Here's the deal with the $2.5 billion at the center of Lynn Tilton's fraud case
(Getty Images/ Alberto Rodriguez )Patriarch Partners CEO Lynn Tilton.
Federal officials are investigating how Lynn Tilton managed three funds controlling more than $2.5 billion in collateralized loan obligation (CLO) funds she has run through Patriarch Partners, her private-equity firm.
In fraud charges filed against Tilton on Monday by the Securities and Exchange Commission, investigators said her management of $2.5 billion worth of CLO funds allowed her firm to reap $200 million in fees to which it was not entitled, even as some of Patriarch's portfolio companies missed deadlines for loan payments.
One of them, called Zohar I in the court order, was issued in 2003, and, SEC investigators said, is a $532 million fund. The fund was set to mature in November of this year, but the SEC's order says Tilton communicated with investors and told them that without an "extension on the maturity date, they will suffer significant losses when their notes in the CLO fund mature in November 2015."
The problem is that Zohar I investments overlap with Zohar II and III investments, according to the SEC. "Any default in Zohar I would have significant ramifications for Zohar II and Zohar III as well," it says.
Though Zohar I's maturity date was in just a few months, the second and third funds have a longer horizon ahead of them:
(The Securities and Exchange Commission)Tilton operated three CLOs to support her portfolio companies' finances.
In February 2013, the credit-rating service Moody's decided to stop covering Zohar's first fund and downgraded Zohar II debt from B2 (the closest to investment-grade that debt can be rated) to Caa2 (effectively junk status).
The SEC says Tilton's portfolio — which consists of dozens of companies ranging from cosmetics to helicopters to media to home decor — isn't performing well. The SEC said: "The portfolio companies as a whole have performed worse than expected."
The portfolio companies in Tilton's Patriarch portfolio have also struggled to meet lending obligations, according to the SEC: "Certain portfolio companies have failed to pay as much as 90% of the interest they owe Zohar funds," and, according to the order, Tilton's investors were asking questions: "An email from an employee at the trustee to a Patriarch employee questions why there are 'multiple uncollected interest payments for Zohar II and III.'"
Tilton does not appear to have raised a fourth Zohar fund, though, she said in a 2009 report that she was contemplating raising a new one as Zohar III was nearing full allocation.
Tilton has regularly evaded interview questions addressing specifically how she makes money; however, at Patriarch's website, she has a link to a 100-plus-page patent that aims to explain her methods.
Business Insider has reached out to Patriarch Partners for comment. In an e-mail statement to media, the firm said: "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. We look forward to the opportunity to vigorously defend ourselves against the SEC's allegations. Patriarch is focused on the restructure and rebuild of deeply distressed American companies and we do this through a unique CLO structure that explicitly provides for the flexibility to turnaround distressed companies and create value for the Funds and its noteholders. Zohar note holders are sophisticated investors that have extensive information to evaluate the cash flow performance of the Funds and the performance of underlying companies."
Though the SEC's court order does not specify individual investors in Patriarch and Zohar CLO funds, Business Insider is interested in speaking with them about their experience with Tilton. You can reach us at jmarino@businessinsider.com with your story.
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