German investors in Patriarch Partners’ two CLO funds filed suit in New York earlier this week. The investors claim private equity maven Lynn Tilton lost $45 million of their money as a result of misrepresentations made by her firm regarding the quality of the investments in the funds.
According to the Wall Street Journal’s Peg Brickly, Norddeutsche Landesbank Girozentrale and its Hannover Funding Company affiliate were hoodwinked into investing $135 million into the two CLO funds suggesting Tilton and Patriarch operated the funds “for their own benefit and profit.”
“Defendants do not buy companies to improve them. They buy control of companies to siphon off any value in those companies and divert loan proceeds to themselves for as long as possible,” the investors’ lawyers told Brickly.
The SEC is currently investigating Tilton and her firm to determine whether they hid the poor performance of the funds in order to generate higher fees – said to be as much as $200 million.
The plaintiff’s in the lawsuit argue that Tilton’s firm hid loans that defaulted within the funds to avoid lowering fees not to mention carrying some of the obligations at full value despite the fact they were non-performing.
Patriarch Partners and Tilton have denied any wrongdoing but apparently the German investors couldn’t wait any longer for justice to be served.
The SEC’s proceedings have been prolonged while the courts decide whether or not the case should ultimately be heard before a judge in a regular court or an administrative judge operating under the SEC’s administrative oversight.
Tilton raised $2.5 billion from investors over the course of four years between 2003 and 2007. As recently as 2011 there were accusations that the funds were anything but kosher and quite possibly the equivalent of junk status.
Soon it will become obvious to advisors why full disclosure and transparency is vital to successful wealth management.
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