By Sarah N. Lynch
WASHINGTON (Reuters) - U.S. regulators on Monday accused flamboyant New York financier Lynn Tilton and her advisory business of defrauding investors by hiding the poor performance of assets underlying three collateralized loan obligation funds.
The Securities and Exchange Commission said Tilton and several of her Patriarch Partners firms were able to collect almost $200 million in fees by not properly valuing the assets in the funds through the methodology described to investors.
Known for her flashy outfits and colorful language, Tilton has portrayed herself as a hard-charging female executive in a field dominated by men. The former investment banker for Morgan Stanley (N:MS) and Goldman Sachs Group Inc (N:GS) has referred to herself as the "turnaround queen" because of her penchant for buying distressed assets and rejuvenating them.
Tilton plans to fight the SEC's charges in the agency's in-house court, a Patriarch spokeswoman said.
In an administrative hearing, SEC enforcement lawyers and the defense counsel present their case before an agency judge. The losing party can appeal the decision, first to the five-member commission and ultimately to a federal appeals court.
"We are disappointed that the SEC has chosen to bring an enforcement action that is ill-founded and at odds with Patriarch's investment strategy, which was consistently disclosed since the inception of the funds," the Patriarch spokeswoman said.
According to the SEC's lawsuit, Tilton, 55, and several of her Patriarch Partners investment fund companies misled investors in the three "Zohar" collateralized debt obligation funds.
The SEC said the Zohar funds raised $2.5 billion from investors and used the money to make loans to distressed companies. The companies, however, failed to perform well and did not make some or all of the interest payments back to the funds over several years.
In fact, the SEC said, internal Patriarch emails it obtained in the probe showed Tilton directed how much interest each company had to pay, and in some cases, the amounts she demanded did not match those due on the loans.
The SEC said she failed to use the valuation method described to investors, masking the poor performance and boosting her firm's compensation by nearly $200 million.
The agency also accused the firm of filing false financial reports. The complaint does not specify how much in penalties could be at stake in the case.
"Tilton breached her fiduciary duty to her clients," SEC Enforcement Director Andrew Ceresney told reporters Monday.
Tilton is one of the more high-profile asset managers targeted by the SEC in recent years. The media often quoted her as a valuation expert during the financial crisis.
Later, however, she clashed with Forbes after it published a series of articles raising questions about her business and accusing her of fraud.
According to SEC public records, Patriarch Partners, which is known for investing in troubled companies in manufacturing and heavy industry, reported assets under management of about $5.3 billion as of Feb. 28, 2014.