Tuesday, March 31, 2015

It's Official: Lynn Tilton, Manager of Zohar Funds ($2.5 billion), Charged With Fraud

Yesterday, the SEC announced fraud charges against Lynn Tilton, an investment adviser, and her New York based Patriarch Partners. Here's a video posted on YouTube detailing Tilton's mission:

Instead of showing Zohar investors actual valuations, the value of loan assets within the portfolio remained unchanged from the time they were acquired, even though it was shown that many of the borrowers on the loans were making partial, or even no interest payments to the fund for several years.

Lynn Tilton, is a resident of New Jersey and Highland Beach, Florida. She is age 55 and manages Patriarch VIII (Zohar I), Patriarch XIV (Zohar II), and Patriarch XV (Zohar III), collectively, the “Patriarch Collateral Managers”.  Each fund had the following amounts and maturities as noted in the order:
Source: Lynn Tilton, et. al, SEC Order
 Within the deal documents, Tilton was required to provide investors with monthly reports which assigned loans into categories - the highest category meant that the loan was current on all interest payments. Each category impacted the fund's “overcollateralization” ratio, which was meant to reflect "the likelihood that investors will receive a return on their principal."

OC Ratio = Value of Funds’ Loan Assets / CLO Investors’ Principal 

If this ratio falls below zero Tilton does not receive full management fees and must cede a certain amount of control to the investors. It is the SEC's beleif that documents were intentionally modified to preserve management fees and total control of the company. In other words, the financial statements that were reported by Zohar Funds failed to provide an impairment analysis. They also claimed assets were reported at fair values when they were not. "Tilton repeatedly and falsely certified that the financial statements were prepared in accordance with Generally Accepted Accounting Principles (GAAP)," claimed the announcement.

Instead of updating investors about the nature of the distressed loans that made up the CLO's, Lynn Tilton led investors to believe valuations were handled outside of her office and were subject to audits. “We allege," said Andrew J. Ceresney, Director of the SEC’s Enforcement Division, "that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled.” The three CLO funds managed by Patriarch Partners are known as the Zohar Funds. Collectively, over $2.5 billion has been raised from investors.

Tildon has now informed investors in Zohar Funds I that if they do not extend the maturity of their notes they will experience a significant loss when the notes mature on November 2015. Any default in Zohar I will also have significant ramifications for Zohar II and Zohar III.

 Source: SEC Lynn Tilton, et al. Order