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

Lynn Tilton was rushing to get dressed at her home in Paradise Valley, Ariz., when she got a tip that the Securities and Exchange Commission was about to charge her with fraud. Taking in the news, she froze for a moment, then grabbed her laptop. It happened to be March 16, the 35th anniversary of her father’s death, a devastating event that occurred when Ms. Tilton was 19. She took the timing as an omen.
For more than five years, Ms. Tilton had known that the SEC was investigating her and her company, Patriarch Partners, a private equity firm based in New York. Months earlier, settlement negotiations had broken down. In typical SEC fashion, the agency hadn’t communicated its intentions afterward. Now that Ms. Tilton knew they planned to proceed against her, she decided to go to war.
Two weeks later, when the SEC formally announced its administrative action accusing her of defrauding investors in three funds that Patriarch operates, she was ready with a pretaped television interview denying the charges. Two days after that, on April 1, she filed a countersuit in federal court. “So that’s why, if you remember it, it goes from ‘Lynn Tilton Sued’ to ‘Lynn Tilton Fights Back’ to ‘Lynn Tilton Sues the SEC,’ ” she says, beaming. “That was not at all by accident.”
Ms. Tilton pioneered a form of financial engineering that allowed her to bundle loans to deeply troubled companies and turn them into securities, get them investment-grade ratings, and then sell them to investors. Using this method, she built Patriarch into a colossus that manages billions of dollars in loan investments. She’s also come to own 74 companies outright, including MD Helicopters, Dura Automotive Systems, and Stila Cosmetics, as well as paper mills and copper forges, many of them acquired in bankruptcy or close to collapse. Ms. Tilton says it’s her purpose in life to take a long-term view and save the companies she buys, preserving manufacturing jobs across America rather than breaking companies up and selling them off to make a quick buck — the anti-Gordon Gekko. Her companies generate $8 billion in annual revenue, according to Ms. Tilton. “We’ve saved 700,000 jobs in this country,” she says. “No one will ever take that from me.”
SEC CHARGES FIDUCIARY BREACH
The SEC says she defrauded investors in three collateralized loan obligation (CLO) funds called Zohar I, II, and III by reporting the loans the funds held as “performing” to her investors when the companies were struggling to pay what they owed and perhaps should have been in default or even liquidated. In the process, the SEC contends, Patriarch retained control of the companies and collected $200 million in management fees that it shouldn’t have.
“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,” said the SEC’s head of enforcement, Andrew Ceresney.
In her suit against the SEC, Ms. Tilton accused the agency of violating her constitutional rights by bringing its case within its in-house administrative law system. The 2010 Dodd-Frank financial reform act grants the SEC greater flexibility to file cases through its internal system, as opposed to federal court. Ms. Tilton and others argue that this grants the agency an unfair advantage. It gives her limited discovery and only four months to prepare a defense. It also forces her to have her case heard by an internal SEC judge. (A federal judge took the SEC’s side, dismissing Ms. Tilton’s suit on June 30. Ms. Tilton has appealed.)
Ms. Tilton was just getting started, electing to argue her cause with all the subtlety of Donald Trump running for president. She launched a social media campaign unprecedented in the history of financial regulation. Part straight business public relations (“I am a girl who loves mills & manufacturing. We are the proud makers of things. So proud of the men of Gorham Tissue”) and part daily aphorisms (“The beauty of butterflies like the power of poetry touch our hearts and capture our imaginations #Beautyeverlasting”), Ms. Tilton’s 140-character streams of consciousness radiate from Twitter at all hours of the day. She created a glossary of hashtags to highlight her struggle—#SheForAll, #FightForTruth, #JusticeForLynn, etc. — and invited workers at Patriarch-owned companies to express their support. Her Instagram account features soft-focus pictures of her in studded leather, 6-inch stilettos, and backless ballgowns, sometimes posing at factories she owns, interspersed with images of butterflies. It’s all intended to point up her role as a spiritualist and savior of American manufacturing.
“I purchase and lend to companies that would have otherwise been destroyed or liquidated and had absolutely no access to capital,” reads one of the captions. Ms. Tilton’s savvy for making distressed-debt investments has made her a very wealthy woman, while also, she argues, helping to protect American families from financial ruin. If you take her at her word, the SEC’s case against Patriarch appears ironic: The agency, in her view, is accusing her of putting the interests of the companies she invests in ahead of the financial interests of the same investors whose money she’s using to support the companies. She says she cares too much about the fate of her companies to let them die. But what the SEC may be saying is that Ms. Tilton enriches herself first, while wrapping herself in the flag.
“I have long felt that who I am and what I do is really misunderstood,” she says. “I am about making life better for other people. Yes, it’s a business, and I have borrowed money from people. But I work 20 hours a day, seven days a week, in the interest of repaying and being responsible to all my constituents. That is not an exaggeration.” She pauses to smooth her hair down over her shoulders. “The biggest issue for me is, how do I protect my companies and my people during this battle? And how do I defend my reputation during a period where people just believe headlines and don’t wait for results?”
NOT SUPPOSED TO HAPPEN
Sitting in her office in Lower Manhattan, dripping in diamonds and sporting a deep tan, Ms. Tilton explains that none of this was supposed to happen. She is flanked by her lawyer, a crisis PR expert, and an assistant who silently places two phones and a beverage on the table in front of her. The room itself is a shrine to Ms. Tilton, decorated with pictures of her and showcasing her companies’ products. Before she started Patriarch in 2000, she says in a honeyed tone, she’d been planning on retiring and becoming “an island girl,” moving someplace quiet and beachy with her teenage daughter, Carly. But then a jolt of inspiration came to her, and she realized her life was meant to be about something more than making deals.
A Jersey girl with an undergraduate degree from Yale and an MBA from Columbia, Ms. Tilton had spent 19 years working on Wall Street, initially as an investment banker at Morgan Stanley and Goldman Sachs, and later as a specialist trading distressed-company loans. In 1993 she joined Amroc Investments, a boutique investment firm co-founded by the brother-sister investing team Marc Lasry and Sonia Gardner. Ms. Tilton was a senior saleswoman with a handful of customers who paid lavishly for her ideas. “She’s brilliant,” says a former client who asked not to be named because his employer doesn’t permit him to comment publicly. “Like, extraordinarily intelligent. She knows how to make money.”
At the same time, Ms. Tilton developed a reputation for being difficult to work with, albeit not in the way that’s typical for professional women tagged with the label. She had come into her prime during the age of strippers on trading floors and the “boom-boom room,” when many Wall Street firms operated like high-testosterone mosh pits. Any woman who wanted to make it there had to adapt, which Ms. Tilton did, but on her own terms. “There was no sexual harassment training — it was a male industry and very few women,” Ms. Tilton says. “You either stay or you go. Many women went. I stayed.”
While most women at major banks chopped off their hair and loaded up on boxy suits, Ms. Tilton cultivated a flamboyant, hypersexual persona, a dominatrix with a calculator. While her look invites some unwanted attention — “I can live with the judgment,” she says — it’s clearly by design. “I think part of the reason women do not get where they should be in male worlds,” Ms. Tilton says in a gravelly voice, “is because they stop acting like women and try to be more like men.”
Stories of her antics — squeezing the derrières of male colleagues, coming up behind them and sticking her tongue in their ears — are legendary. At a dinner in Chicago celebrating a particularly successful deal many years back, Ms. Tilton grabbed a male client and kissed him, according to a person who was there. The client was so shaken that he complained to Ms. Tilton’s bosses the next day. Ms. Tilton says she doesn’t recall the incident, although she recounts many of them herself. “You understand that it’s all part of the game,” she says, speaking in general terms. “I was attractive, and that drew men to me, and as long as it didn’t get in the way of me being able to be successful using my intellect and my talent, then I didn’t let it bother me.”
SUED MERRILL LYNCH
Eventually, some things did bother her. In 1991 she sued Merrill Lynch, her employer then, for sexual harassment and discrimination, alleging the firm had refused to pay her what she was owed. (Merrill denied the charges, and the case was settled right before going to trial.)
Amroc, with Ms. Gardner at the helm, was known as a relatively benign environment for women. “We were just like one big, dysfunctional family,” as Amy Siskind, a former saleswoman there, puts it. But even at Amroc, Ms. Tilton seemed to be reacting to misogyny in the industry when, in 1998, she came up with the idea for the Christmas Card.
Do not Google “Lynn Tilton” and “Christmas card” at the office. If you do, two images will appear: On one side, thirtysomething Tilton stands in black satin panties, bra, and knee-high boots, holding a whip. On the other, she straddles a step stool in a red lace teddy, cowboy boots, and a Santa hat. “I had been working with very few accounts,” Ms. Tilton says. “They were all very close friends, and because most of sales is on the phone, I would get asked all the time, ‘What are you wearing today? What color is your underwear?’ And it didn’t offend me. It was part of the interaction of what I did.” She pauses for a calculated toss of her hair. She had saved a bunch of money, she says, and planned to retire. “My joke to them was, on my way out, I showed them the color of my underwear.”
“My mother told me I would regret it,” she says, sighing. “And I hate when my mother is right.”
With that parting gift, Ms. Tilton moved on from Amroc. The Caribbean was calling. But three of her biggest accounts, Elliott Associates, Nomura and Cerberus Capital, urged her to start her own bank loan trading company so she could continue making money for them. At the same time, Ms. Tilton says, she had her epiphany about doing more for others. “If I could prove that making money and making the world a better place were not mutually exclusive options, maybe I could create a journey that would be an example and be followed,” she says. “I think that the business world and the social world have always been seen as separate, and they don’t have to be.”
In 1998, Ms. Tilton founded Papillon Partners. It was an entrepreneurial extension of what she’d been doing as a saleswoman. Bank loans at the time were traded through private transactions greased by personal relationships. It wasn’t a liquid market. She had three hedge fund clients eager to buy whatever she had to recommend to them. All she had to do was go to banks with high-yield loan departments, find portfolios of troubled loans they were looking to get off their books, value them, and broker the sale. Her take was 1% of the loan amount. Patriarch grew out of Papillon, but there was a short detour.
In early 2000, one of Ms. Tilton’s long-standing clients at Nomura, Dennis Dolan, hired her to run a distressed-debt proprietary trading group at the Japanese bank. Not everyone was eager to work with her; at least one male trader working for Mr. Dolan quit right after she showed up. Her plan had been to do her next big deal there, but she and Mr. Dolan left after a few months to start Patriarch.
PARTNER FROM NOMURA
When Ms. Tilton retells the story, she usually doesn’t mention Mr. Dolan, but according to people who worked with them, he was an equal partner, the “patriarch” in Patriarch. Mr. Dolan had been enormously successful at Nomura in the late 1990s, having made well-timed investments in Internet bubble highfliers such as Global Crossing. His departure was a blow to Nomura.
Ms. Tilton says her work researching individual investments for clients made her realize she wanted to be the investor rather than the middleman, someone with more operational control of the companies she was lending to. Typically, there was a spread between the bid and ask prices on the loans she traded: Banks had to keep capital on their balance sheets to offset distressed loans, which made it expensive for them to hold on to the loans while the underlying companies tried to get their businesses back on track. Investors wanted to be compensated for taking on the risk of the loans while the companies were nursed back to health (or not). Ms. Tilton figured she could create a model where she acquired an entire portfolio of loans from a bank and restructured them herself, effectively making the spread, while continuing to benefit as the companies improved.
The first deal she and Mr. Dolan did was based on that model, and it made Ms. Tilton rich. They acquired a portfolio of 92 troubled commercial loans from FleetBoston Financial, paying the bank about $1 billion for a $1.5 billion face amount of debt. “Fleet’s thinking, ‘By selling at a 30% discount, I now get everyone off my back,’ ” was how one portfolio manager, Lanny Thorndike, described the bank’s strategy to the New York Times. The Wall Street Journal called it a “landmark deal.”
Next, Ms. Tilton and Mr. Dolan had to figure out how to turn the loans into securities — something that would look familiar and could be marketed to investors. “Lo and behold, this was the beginning of the CDO market,” Ms. Tilton says. Bankers at Canadian Imperial Bank of Commerce (CIBC) helped Patriarch package the debt into a CLO called Ark. It was the first time that someone had collateralized bank loans of such low quality and turned them into investment-grade securities based on the anticipated cash flows of all of the portfolio of companies over time. Collateralized debt obligation- and CLO-type models had been used to package higher-quality loans whose performance was easier to predict, but not those of companies in severe financial distress making erratic payments.
Ms. Tilton put her entire $10 million nest egg into Patriarch to fund its first deal. She purchased the equity for next to nothing, which meant she would be repaid after the banks and other investors, but could benefit enormously if the companies did well.
In January 2002, Ms. Tilton patented the structure she used in Ark I and quickly followed up with Ark II, a similar deal Patriarch completed in October 2001 involving 52 company loans acquired from CIBC. Ark I had been so fruitful that Ms. Tilton put $20 million into Ark II, drawn partly from her profit on the first deal. Because it was right after the Sept. 11 terrorist attacks, the loans she and Mr. Dolan acquired came at an even bigger discount than they had in Ark I. The economy recovered quickly, and many of the companies paid off their loans ahead of schedule.
SIGNIFICANT RETURNS
Patriarch served as the collateral manager, choosing the loans that went into the CLOs, and took a 1% management fee. Ms. Tilton made significant returns on her equity holdings in the deals when the companies turned profitable or were sold. They “were probably the most successful CLOs ever done,” she says. As she saw it, she was now in a position to put into practice her philosophy of trying to change the world.
“My father raised us all to give back and to believe that our lives would be defined not by what we gave to ourselves, but what we gave to others, and this was the moment where I could honor my father’s values,” Ms. Tilton says. “I could invest in things and restructure, revive companies and people’s lives.”
In 2002, just when all this was coming together, Mr. Dolan suddenly walked away. Ms. Tilton says that she and Mr. Dolan were “good friends” and that she was sorry to see him go. “He was the wind beneath my wings,” she says. “He was the one who encouraged me to do this.” Mr. Dolan didn’t respond to requests for comment.
Ms. Tilton was left with the empire to herself. She embarked on the painful process of wresting control of the companies, enterprises that had been “left for dead,” as she puts it — textile companies, paper mills, firetruck manufacturer American LaFrance—either as a debtholder or by acquiring an ownership stake through the stock. Once she had ownership, she started to tinker, hoping to rehabilitate or reinvent the businesses. She appointed herself chief executive officer of some and hired managers to run others. Often they were companies that had been badly outpaced by technological change.

Many of the people who worked at Patriarch to improve the companies in its portfolio had the satisfaction of knowing they were helping to keep businesses open, and in the U.S., a rare form of capitalist noblesse oblige. But while Ms. Tilton engendered fierce loyalty in many employees and partners, she chewed through others, creating a lengthy docket of litigation. A lawsuit filed in 2010 against Patriarch by Andrzej Wrobel, a former executive managing a group of technology companies owned by Patriarch, accused Ms. Tilton of violating his contract and firing him to avoid paying him bonuses he said he was owed. Patriarch said he’d been dismissed after abusing his expense account. In one complaint he filed, he accused Ms. Tilton of “conducting a work atmosphere so filled with sexual innuendos and a river of vulgarities as to create needless job stress, tension, emotional distress and humiliation on the part of the employees in her presence.” He also accused her of intentionally wearing skirts so short that people got an eyeful during business meetings. (Mr. Wrobel’s descriptions of Ms. Tilton’s behavior were ultimately stricken from the court docket in the case for being irrelevant, and his claims of breach of contract were dismissed.)
“Am I a soft rose petal falling from the vine? Absolutely I am tough,” Ms. Tilton says, adding that she and Mr. Wrobel hardly crossed paths. “I am not going to tell you that I am easy to work for. But in general, people who work for me know that I would walk through fire for them.”
LAWSUITS WITH PARTNERS
There are also lawsuits involving business partners, including financial-products insurer MBIA, which sued Patriarch for breach of contract in 2009 over obligations relating to Zohar I. As with many of the other lawsuits, Ms. Tilton prevailed in the MBIA case. The federal district judge’s opinion, issued in 2013, granted Ms. Tilton total victory and described her as “vigorous, authoritative, informed and almost entirely supported by documentary evidence.”
The three deals at the center of the SEC’s lawsuit were based on the success of the Arks, but with a few changes. Instead of buying bundles of loans and using them to gain control of companies, Patriarch started buying companies outright and providing all the financing needs to those companies. The debt holdings were securitized into CLOs in three funds while Ms. Tilton often bought up the equity herself. She called the funds Zohar, the name of the chief text of the Jewish kabbalah.
Zohar I, created in 2003, began as an agreement with MBIA, which had insured a group of CDOs that were performing well below expectations. In an arrangement with Patriarch outlined later in court documents, MBIA struck a deal allowing Patriarch to become the manager of the CDOs, with the goal of bringing the investments back to health. Ms. Tilton sold herself and her company to MBIA by arguing that she had the expertise to “bring value” to the investments, according to the same documents. After the transaction was done, Patriarch issued a new set of notes, worth about $532 million, with a maturity date of November 2015. Zohar II and Zohar III, each with $1 billion of notes sold to outside investors, were created in 2005 and 2007, with maturity dates of January 2017 and April 2019. In all of the Zohars, Patriarch has control over which assets are in the fund, how those assets are managed, and whether they’re considered to be performing or if they’re in default, with little requirement that Ms. Tilton share the details with her investors. Investors in II and III can find out which companies are being lent to only if they sign a nondisclosure agreement, although they receive reports showing their loan amounts and payments. In exchange, investors receive a quarterly sum representing the aggregate interest payments of all the companies in the portfolio, and they benefit as the companies recover.
When the financial crisis arrived, many of the companies in the portfolios went into a tailspin. Ms. Tilton acknowledges they’ve performed far worse than she’d hoped. She says she needs more time to turn them around and that having them succeed is for the benefit of everyone involved, including her investors. “Everything I’ve done is disclosed,” she says. “The company, the loan, exactly what the rate of interest is, how much they got paid, and their categories are all disclosed. Anyone could look at it. So I don’t even know where [the SEC is] coming from. I really don’t.”
Ms. Tilton says she’s heard few complaints from her investors, and when she does hear from them she simply points them to the deal documents, which she says grant her license to exercise her discretion. At least one hedge fund, Kawa Capital, a holder of notes in Zohar III, sent a six-page letter to Patriarch in December 2014 outlining concerns that echo some of what the SEC said in its case, however. The letter argued that the ratings agencies had recently stopped rating Zohar III because Patriarch wasn’t giving them enough information, which was a violation of its obligations, and it complained about Patriarch’s lack of transparency. If there was a default, the letter argued, Patriarch wouldn’t be eligible for some of the fees it was collecting, but there was no way for anyone to know if it had happened. Investors, Kawa said, were considering their options. Shortly after, the SEC filed its case. According to two investors, they are sitting back because the SEC is doing the work for them.
Since filing its action, the SEC has continued to contact Ms. Tilton’s investors, including large institutions such as Goldman Sachs, Lloyds Bank, and Wells Fargo, as well as a handful of hedge funds including Värde Partners, Panning Capital Management and Guggenheim Partners. The SEC’s move prompted some Zohar investors to wonder if they should be more proactive about their interests. The law firm Berg & Androphy filed a summons with notice on the heels of the SEC case indicating that it intends to file its own lawsuit on behalf of two Zohar investors, Norddeutsche Landesbank Girozentrale, a German bank, and Hannover Funding. Some of Zohar’s hedge fund investors have consulted with another law firm and are considering their own legal options.
PUTTING ON A BRAVE FACE
Since April, Ms. Tilton has logged thousands of air miles visiting all her companies and putting on a brave face. “Leadership is a lonely role,” she says in her Manhattan office. “Nobody prepares you for the battle, nobody prepares you for the pain of decisions, nobody prepares you for the litigation. I never ventured into this thinking that most of my life would be about that.”
Ms. Tilton stands up and runs a hand over some of the products she’s helped redesign for her companies — “her babies.” There’s a tray of kitchen implements with butterfly-print handles; a sewing machine that interfaces with a tablet PC; a line of hair-care products created with stylist Ken Pavés called You Are Beautiful, destined for Wal-Mart.
She’s still fighting to get her case moved into federal court. In the meantime, she has an October trial date with the SEC to prepare for.
“When this is all over, I hope that my dream to be an island girl will come true,” she says with a sigh. “The problem is I don’t look as good in a thong bikini as I did 15 years ago.”