(Bloomberg) -- After being cleared of wrongdoing in a case by the U.S. Securities and Exchange Commission, New York financier Lynn Tilton faces new claims over how she ran her distressed companies in a lawsuit by three funds she once created and managed to raise money for her portfolio.
Tilton’s Patriarch Partners LLC last year stepped down as manager for the "Zohar" funds -- securities known as collateralized debt obligations that held bundled loans for the companies -- over disputes with a unit of bond insurer MBIA Inc. and minority investors about her performance.
Since then, Tilton has failed to tell the funds that she was holding as much as $45 million on behalf of the portfolio companies, even after 20 of them defaulted on their scheduled payments to the Zohar funds, their attorney Jonathan Pickhardt said Thursday in federal court in Manhattan.
After the defaults, Patriarch should have alerted the Zohar funds to the existence of the cash and allowed them to take it in lieu of the missing payments, he said, calling the practice a "shadow revolver" account.
The Zohar funds, which sued for fraud in January, are seeking permission from U.S. Magistrate Judge Katherine Parker to amend their lawsuit against Patriarch to include additional allegations related to the funds.
The money came to light when the Zohar funds deposed two Patriarch employees in October, Pickhardt said. The Zohar funds’ planned deposition of Tilton was postponed after the revelation, according to the attorney.
The judge didn’t immediately rule on the request to file an amended complaint.
Earlier this week, U.S. District Judge Victor Marrero in Manhattan denied a request by the Zohar funds for a temporary restraining order that would have blocked the disputed funds from being paid out while the case proceeds. The judge ruled the Zohar funds failed to show that Patriarch, absent the $45 million stash, wouldn’t have sufficient money to pay damages if it were to lose at trial.
Investors have questioned whether Tilton was unfairly enriching herself at the expense of the companies she was supposed to be trying to turn around. The January lawsuit accused her of defrauding the funds out of more than $1 billion. She has denied the allegations.
Patriarch’s attorney Lawrence Zweifach said the Zohar funds’ characterization of the money being held by the firm was inaccurate.
“The portfolio companies are borrowing funds and using those funds to run their businesses," Zweifach said in court. "Ms. Tilton is holding and distributing those funds as appropriate."
The case is Zohar CDO 2003-1 Ltd. v. Patriarch Partners LLC, 1:17-cv-00307, U.S. District Court, Southern District of New York (Manhattan).
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