Financial advisor Lynn Tilton has been accused by the SEC of improperly collecting $200 million in fees by misstating the value of pooled corporate loans.
The collateralized loan obligations (CLOs) were made to distressed companies and packaged into three funds by Tilton’s New York City-based Patriarch Partners investment management firm. Patriarch raised more than $2.5 billion by promising investors it would improve the operations of the companies and pay them back with proceeds from the sale of the firms.
But Tilton and Patriarch violated their fiduciary duty by hiding from the investors that the worth of the businesses was deteriorating, the Securities and Exchange Commission said in an administrative proceeding filing.
While not saying specifically what penalties it was seeking, the SEC’s Enforcement Division raised the possibility of fines and taking money from Tilton and Patriarch to pay back investors.
“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,” said SEC Enforcement Director Andrew Ceresney.
Ceresney called valuation an important area for the SEC’s enforcement effort, particularly for complex financial instruments such as CLOs.
In recent months, officials at the SEC’s Office of Compliance Inspections and Examinations have said they have heightened their watch for faulty valuations by advisors.
The SEC’s filing claimed Tilton and her firms violated their legal obligation to give investors an accurate monthly value of the loans’ “overcollateralization” ratio, which reflects the likelihood that investors will receive a return on their principal.
If the ratio falls below a specific threshold, they are not entitled to receive certain management fees and may be required to cede more control of fund management to investors, the SEC said.
The SEC claimed some of the companies have failed to pay the funds 90 percent of the interest owed.