Tilton's Patriarch Partners Defeats $1 Billion Fraud Lawsuit

(Bloomberg) -- New York financier Lynn Tilton is ending 2017 on a high note, prevailing in a civil racketeering suit three months after being cleared of wrongdoing in a case by the U.S. Securities and Exchange Commission.

The suit against Tilton and her Patriarch Partners LLC was filed by a group of funds she once created and managed to raise money for her portfolio. The Zohar funds, which sued in January, are collateralized loan obligations filled with loans to distressed companies managed by her and Patriarch. Last year, Patriarch stepped down as the funds’ manager over disputes with a unit of bond insurer MBIA Inc. and minority investors about her performance.

The funds, now managed by Alvarez & Marsal, accused Tilton of defrauding them out of more than $1 billion.

“This suit –- which was filed for no other purpose than to harass and publicly defame Ms. Tilton -– had absolutely no basis in fact or law, and today’s dismissal confirms that,” Patriarch Partners said in a statement. “Importantly, this dismissal marks a total rejection of fraud claims that have been brought against Lynn Tilton, both by the SEC and now by Alvarez & Marsal.”

Jonathan Pickhardt, a lawyer for the funds, didn’t immediately return an email message seeking comment.

The suit is barred in part under a federal law that aims to reign in excessive litigation, U.S. District Judge William Pauley ruled Friday in Manhattan. A provision of the Private Securities Litigation Reform Act of 1995 prohibits racketeering claims based on the purchase or sale of securities. (Racketeering claims, if successful, can provide plaintiffs with triple damages.)

An “integral component” of the alleged looting scheme “included pillaging portfolio companies of their equity, re-directing Zohar’s equity interests for defendants’ benefit, and diverting the equity distributions into defendants’ coffers -- all actions coinciding with the purchase or sale of securities," the judge wrote. “This aspect of defendants’ scheme runs headlong” into the prohibition in the 1995 securities law.

In September, Tilton defeated an SEC lawsuit after an administrative judge said the agency failed to prove that she bilked investors out of more than $200 million. But earlier this month in Delaware, she lost a legal challenge to her removal from the boards of companies within the Zohar funds she claimed to control.

The Zohar funds also claimed that Tilton failed to tell them 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 funds. The funds claimed that after the defaults, Patriarch should have alerted them to the existence of the cash and allowed them to take it in lieu of the missing payments.

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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