Lynn Tilton, the "Wonder Woman of Wall Street," sues the government after it sues her

After the SEC sues her, private equity honcho Lynn Tilton returns the favor and says her case should be heard in federal court rather than by an administrative law judge appointed by the regulator.

The “Wonder Woman of Wall Street” has sued the government after it sued her.

In her counterattack, Lynn Tilton is demanding the Securities and Exchange Commission give up the home-field advantage it reserved for itself when it charged her and her Patriarch Partners private-equity firm on Monday with misleading investors and collecting $200 million in undeserved fees. She wants her case heard in federal court, rather than by an administrative law judge appointed by the SEC. She argues that it’s unconstitutional for the commission to bring charges against her and then have a person hired by the agency decide whether the case has merit.

Ms. Tilton is represented by attorneys at Skadden Arps Slate Meagher & Flom and by Susan Brune. In 2009, Ms. Brune successfully defended a Bear Stearns hedge fund manager who in a seminal crisis-era case was criminally tried for defrauding investors.

All this legal firepower may have been hired because the SEC’s case against Ms. Tilton seems simple and strong, said Francine McKenna, an accounting expert who writes the prize-winning blog retheauditors.com.
The commission says that Ms. Tilton represented to investors that she used generally accepted accounting principles to value her firm’s portfolio when in fact she did not. GAAP has strict rules about how to value the sort of illiquid investments held by Ms. Tilton’s fund and following those rules likely would have forced her to write down the value of her holdings. By declining to use GAAP and using what the SEC called a “discretionary approach,” Ms. Tilton was able to value investments more highly and, in the process, charge clients bigger fees.

“At its heart, this is a straight-forward case about accounting disclosures,” Ms. McKenna said.

In an interview with CNBC Wednesday, Ms. Tilton said investors understood how she valued her portfolio. “I’m all about disclosures,” she said. “My most sophisticated investors had all the information they needed.”
In attacking the SEC, Ms. Tilton is picking up on a campaign among some business leaders who are unhappy that the agency increasingly prefers to have fraud cases heard by administrative law judges appointed by its commissioners, rather than by federal judges appointed by the president. In many ways, the SEC’s preference for administrative law hearings resembles the way Wall Street brokerage firms require customer complaints be heard by arbitration panels rather than in court.

Agency officials say the administrative route is preferable because it results in faster outcomes. It also tends to result in favorable outcomes for the SEC because defendants have fewer rights to challenge evidence than in federal court. A Wall Street Journal investigation last year discovered that administrative law judges ruled in favor of the SEC in every verdict over a 12-month period.

In a separate case last year, a hedge-fund manager named Joseph Stilwell filed a suit challenging the SEC’s right to charge him in an administrative proceeding. But Mr. Stilwell and the SEC settled their proceeding two weeks ago, before the judge could rule on the merits of his complaint. Perhaps Ms. Tilton will stick with her case longer, considering that in her suit she claims that her career, reputation and the future of the struggling companies in which she invests are all on the line.

She took to Twitter Wednesday to write: “I hold hope that our nation will allow a fair fight for truth, to defend integrity and intent against allegations, and provide fair forums.”