The SEC on Monday charged Patriarch Partners and CEO Lynn Tilton with improper asset valuation and failure to disclose poor performance of loan assets in three collateralized loan obligation funds the private equity firm manages.
SEC officials said that Patriarch and related firms Patriarch Partners VIII, Patriarch Partners XIV and Patriarch Partners XV defrauded clients in CLO funds by failing to follow valuation methods described in offering documents for the funds, which are composed of loans to distressed companies.
The alleged improper valuation methods caused investors to pay nearly $200 million more in higher management fees and to lose access to earlier principal repayments in the event of underperformance. The three CLO funds managed by Ms. Tilton and Patriarch Partners firms, known as the Zohar funds, have raised $2.5 billion from investors, the SEC said.
According to SEC registration documents, New York-based Patriarch Partners manages $5.3 billion in five accounts listed as pooled investment vehicles, all of which are based outside the U.S. Calls to Patriarch were not returned at press time. According to its website, Patriarch funds currently hold equity positions in more than 70 companies, and two-thirds are control positions.
In the charges, SEC officials said that fund contracts required Patriarch officials to state the value of each loan asset in monthly reports, but that the firm failed to do so by measurable testing methods, while stating that the analysis had occurred and that financial statements met proper accounting principles. Some of the funds would have failed testing as early as 2009, said Andrew Ceresney, Securities and Exchange Commission enforcement director, on a press briefing call.
Ms. Tilton “has a long-running practice of overvaluing assets” and she violated her fiduciary duty to clients by failing to disclose that she exercised subjective discretion over valuation levels, Mr. Ceresney said, characterizing it as “a complicated investigation with lots of different pieces.”
With one Patriarch fund scheduled to mature in November, SEC officials requested an administrative hearing instead of going to court. “Investors will benefit because it will provide a prompt hearing,” Mr. Ceresney said. He added that improper valuations “obviously remain a priority” for the SEC.