SEC announces fraud charges tied to CLO funds

By Staff | March 30, 2015 | Last updated on March 30, 2015
2 min read

The Securities and Exchange Commission has announced fraud charges against an investment adviser and her New York-based firms, which are accused of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds they manage.

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The SEC’s Enforcement Division alleges Lynn Tilton and her Patriarch Partners firms have breached their fiduciary duties and defrauded clients by failing to value assets using the methodology described to investors in offering documents for their CLO funds.

Instead, says SEC, nearly all valuations of loan assets have been reported to investors as unchanged from the time they were acquired, despite many of the companies making partial or no interest payments to the funds for several years. As a result, adds SEC, investors have allegedly not only been misled to believe that objective valuation analyses were being performed, but Tilton and her firms allegedly have avoided significantly reduced management fees.

“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” says Andrew J. Ceresney, director of the SEC’s Enforcement Division. “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.”

According to the SEC’s order instituting an administrative proceeding, CLO funds raise capital by issuing secured notes and using proceeds to purchase a portfolio of collateral typically comprised of commercial loans. Investors are then paid based on cash flows and other proceeds from the collateral.

The Commission adds that the three CLO funds managed by Tilton and the Patriarch Partners firms are collectively known as the Zohar funds, and it alleges that more than $2.5 billion has been raised from investors through the funds. For more details, click here.

The SEC’s Enforcement Division alleges that Tilton, Patriarch Partners LLC, Patriarch Partners VIII LLC, Patriarch Partners XIV LLC, and Patriarch Partners XV LLC violated Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940 and Rule 206-4(8).

It adds Patriarch Partners LLC also is charged with aiding and abetting violations by the others. The matter will be scheduled for a public hearing before an administrative law judge for proceedings to adjudicate the Enforcement Division’s allegations and determine what, if any, remedial actions are appropriate.

The SEC’s investigation has been conducted by Amy Sumner, Amanda de Roo, and John Smith with assistance from Judy Bizu. Also contributing to the investigation were Allison Lee, Creola Kelly, and Brent Mitchell. The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato. The Enforcement Division’s litigation will be led by Dugan Bliss, Nicholas Heinke, and Ms. Sumner. staff


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