The New York State Supreme Court has ruled that the $45M institutional investor fraud case against Patriarch Partners and owner Lynn Tilton may proceed. The financier had sought to have the fraud charges against her dropped.
The plaintiff is Norddeutsche Landesbank Girozentrale. The German bank, known as Nord/LG, invested in Tilton’s Zohar debt fund. Nord/LG later accused Tilton of misrepresenting the fund’s structure and brought a collateralized debt obligation lawsuit against her and her firm.
The German bank contends that it didn’t know that fraud might have occurred until the US Securities and Exchange Commission brought a civil case against Tilton and her firm in 2015. The regulator wants disgorgement of about $200M in allegedly bogus fees that Tilton and Patriarch purportedly collected for their services. The SEc also wants to bar Tilton from the industry.
She allegedly offered collateralized debt obligations that, according to investors, were not actually CDOs. Instead,they were private equity funds that she used to gain controlling positions in portfolio companies.
While Tilton’s legal team has argued that the plaintiffs should have known that their investments included an equity component, the New York court, in a split ruling, found that even if the plaintiffs had known about this particular component, it is plausible that they still might not have known to what extent.
Nord/LG claims that they lost $45M from investing in the purported CDOs.
It was in 2015 that the SEC filed its CDO fraud case against Tilton and Patriarch Partners claiming that they breached their fiduciary duties when they valued the loans in certain funds by employing a different methodology than the one that the funds’ offering documents said would be used. As a result, claims that the SEC, Tilton misled investors about these complex investment products while getting paid nearly $200M in fees. The SEC said that Tilton created up a “major conflict of interest,” which she failed to disclose to investors. The regulator takes issue with how her investment firm reported the value of investments held by the collateralized loan obligations.
The Zohar Funds
Patriarch managed the funds and, as of the end of March 2015, had raised over $2.5M in investor money of them. The Zohar funds have since filed a $1B lawsuit suing Patriarch and Tilton claiming that the two of them took assets and money from the businesses that they oversaw. Both deny the allegations.
Patriarch’s investors are typically big, sophisticated institutions. The investment firm has invested in numerous companies.
Earlier this month, The Wall Street Journal reported that according to new court papers, Patriarch Partners withdrew almost $3M out of TransCare Corp. a year before the latter filed for bankruptcy leaving about 1700 workers unemployed and unpaid. The WSJ said that according to an anonymous source—an ex-TransCare CFO—this former executive, while in that role, was required to pay management fees and loan interest to Patriarch first before the company could pay taxes, health insurance premiums payroll, and vendors. TransCare is just one of several companies that used to be managed by Patriarch and was shut down last year. According to bankruptcy documents, Tilton, via funds she controls, is the owner of TransCare.
The SSEK Partners Group is an institutional investor fraud law firm.
Lynn Tilton suffers setback in fraud case, New York Post, February 23, 2017
Lynn Tilton’s Firm Took Millions From Failing Ambulance Operator, The WSJ, February 14, 2017