Lynn Tilton wins SEC fraud trial

An administrative law judge ruled in favor of Ms. Tilton over allegations that she and her firm, Patriarch Partners, bilked investors out of more than $200 million

Sep 27, 2017 @ 5:36 pm

By Bloomberg News

Lynn Tilton, whose aggressive management style made her a success on male-dominated Wall Street, won a Securities and Exchange Commission trial she'd spent months fighting to avoid.

SEC administrative law judge Carol Fox Foelak ruled in favor of Tilton over allegations that she and her firm, Patriarch Partners, bilked investors out of more than $200 million.

"It is concluded that the violations" alleged by the SEC are "unproven," Foelak wrote in her ruling issued Wednesday. "Thus, the proceeding will be dismissed."

The decision follows a three-week trial that ended last November. Tilton, who repeatedly argued that the SEC's internal legal process is unfair to defendants, went all the way to the U.S. Supreme Court in her unsuccessful efforts to have the case heard in federal court, rather than before an SEC administrative judge.

(More: Lynn Tilton, the "Wonder Woman of Wall Street," goes from corporate savior to SEC target)

In a finance career that's spanned more than three decades, Tilton gained notoriety for her unique spin on the common Wall Street practice of buying failing companies and then trying to turn them around. What set Tilton apart is that she owned the struggling businesses, while also controlling investment funds that lent them money. She did this by raising cash from clients and using it to buy securitized debt that was largely backed by loans to her portfolio companies.

The SEC sued Tilton in March 2015, alleging she defrauded her investors by telling them the loans were sound even though the companies had made partial or no interest payments for years. The agency is seeking the return of more than $200 million in fees that Patriarch collected for managing clients' money.

Tilton disputed the SEC's case, arguing that her investors gave her discretion to change loan terms or forgive missed payments on the high-interest loans in order to boost the value of the companies. She has also challenged the SEC administrative law process, claiming that the manner in which the agency's in-house judges are selected violates the U.S. Constitution.

Tilton's win reduces the likelihood of an appeal to the New York-based appeals court, which has jurisdiction over Wall Street.

(More: SEC's Clayton says agency is 'pushing' toward a fiduciary rule, working with DOL)

The SEC has defended its process as fair and efficient. Last year, the agency added new rules giving defendants as long as 10 months to prepare for trial and allowing for some pretrial depositions. The SEC, which spent five years investigating Tilton, has denied her claims of agency misconduct.

The case is In the Matter of Lynn Tilton, 3-16462, U.S. Securities and Exchange Commission (Manhattan).

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