Tag: Lynn Tilton

The Triumph of Lynn Tilton

Lynn Tilton and her firm, Patriarch Partners, are known for their high-risk, high-return investments in distressed companies. The Securities and Exchange Commission brought a case against her and the firm claiming that they were using improper valuations, failing to mark down assets when the investment became more distressed. Ms. Tilton chose to fight the charges and had to on the SEC’s home turf. The SEC chose to bring the case as an action in its administrative court’s instead of federal district court.

She fought a two-prong attack. The first was challenging the SEC’s use of an administrative court. The US Supreme Court September denied hearing the appeal of Lynn Tilton in her case arguing that the appointment of administrative law judges was Unconstitutional under the Appointments Clause.

That lead her back to fight her case in front the ALJ. Tilton won her case last week. Administrative Law Judge Carol Fox Foelak dismissed the SEC’s case. The judge concluded that the SEC failed to prove Tilton deceived the highly sophisticated institutional investors in her funds about the finances of the troubled companies in her underlying portfolio.

“I feel truly grateful to Judge Foelak,” Tilton said. “But it doesn’t change my opinion that cases like these belong in federal court. I absolutely feel my rights were compromised.”

According to Reuters, Tilton lawyer Randy Mastro of Gibson Dunn said he filed dozens of motions to obtain discovery that defense lawyers would have been entitled to see under the Federal Rules of Civil Procedure. Most were denied. Nor could Gibson Dunn lawyers depose SEC witnesses. (The SEC changed its rules in 2016 to give more discovery to defendants in administrative proceedings, but the new rules didn’t apply to discovery in Tilton’s case.) At trial, defense lawyers had to cross-examine SEC witnesses without prior knowledge of what they might say.

This is not quite the final say in the matter. Judge Foelak’s initial decision can be overturned by the SEC commissioners. That is part of what currently saves the ALJs under the Appointments Clause. It ultimately comes done to what the Presidentially-appointed SEC Commissioners decide.

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SEC Brings a Valuation Case Against an Investment Adviser

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Lynn Tilton and her firm, Patriarch Partners, are known for their high-risk, high-return investments in distressed companies. The Securities and Exchange Commission brought a case against her and the firm claiming that they were using improper valuations, failing to mark down assets when the investment became more distressed.

At this point we only have the SEC’s charges. According to a quote in the Wall Street Journal: “I’m choosing to fight,” Ms. Tilton said. “My reputation is very important to me and my companies. When my integrity or my intent are questioned, I fight back and let truth prevail.”

She will have to fight the SEC on its home turf. The SEC chose to bring the case as an action in its administrative court,s instead of federal district court. According to the Wall Street Journal the SEC brought the case through its in-house court in part to try to move the case quickly, since one of the funds at issue has a maturity date in November 2015.

Debt tends to be trickier to value than equity. There is the judgment call about how likely you are to have the debt repaid. This is even trickier with Patriarch where the debt is being used to fund the company’s turnaround being managed by Tilton and her companies. She would have the direct power or influence to determine when debt was repaid.

Patriarch’s valuation policy calls for current loans to be valued at the principal amount of the outstanding loan. A defaulted loan is supposed to be written down under the policy. The SEC viewed a default under the documents to be when the debtor fails to make an interest payment. According to the SEC, Tilton determined a loan in default when she will no longer provide financial and management support to the company.

In addition, the funds were supposed to have GAAP-compliant financial statements. Under GAAP, a loan is impaired, and must be measured for impairment when, based on all available information, it is probable that the creditor will be unable to collect all amounts due for interest and principal based on the contract with the debtor.

The difference in characterizing a default resulted in more than $200 million in fees earned on the higher valuations. It sounds like many of the problems could have been fixed with a stronger compliance program. Disclosure would have solved many of the issues in the SEC Order.

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