June 26, 2015 — It is a crime for investment advisory firms to mislead investors or breach their fiduciary duties by failing to honor their commitment to keep investors apprised of the true value of their investments. To assist in the fight against illegal investment fraud, the U.S. Congress established a whistleblower program as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Informants who alert the Securities and Exchange Commission (SEC) to crimes involving investment fraud may be entitled to a reward for their courage in collaborating with the government. Tipsters receive as much as thirty percent of the funds the government collects based on the whistleblower’s unique information, so long as the total recovery tops $1 million.
Investment Adviser and Her Firms Allegedly Protected Management Fees and Fund Control by Failing to Assess Value of Fund Assets Using Methodology Required by Investment Agreements
The SEC has filed fraud charges against a New York investment adviser and her firms for allegedly concealing the lackluster performance of loan assets in collateralized loan obligation (CLO) funds managed by the firms. Lynn Tilton and Patriarch Partners allegedly cheated firm clients by failing to use the methodology for valuing assets that was set forth in the CLO funds’ offering documents.
CLO funds work by issuing secured notes and then using the capital raised to buy a portfolio of collateral that generally consists of commercial loans. Investors profit from the proceeds from the collateral. Tilton and Patriarch Partners have raised more than $2.5 billion for three CLO funds known as the Zohar funds. Tilton’s stated investment strategy for the funds reportedly has been to turn around the failing performance of distressed portfolio companies until they can eliminate debt, increase their value and be profitably sold.
Tilton and her Patriarch Partners firms are contractually obligated to generate monthly reports that categorize loan asset values using a method specified in transaction documents. This categorization is required to calculate a CLO fund’s “overcollateralization” ratio — an assessment that predicts whether investors can expect a return on their principal. When the overcollateralization ratio is bad, Tilton and Patriarch Partners lose their entitlement to particular management fees and may even be forced to provide their investors with a greater role in fund management.
Instead of valuing the CLO funds’ assets using the methodology imposed in Patriarch Partners’ agreements with their investors, Tilton and her firms have allegedly valued fund assets based solely on Tilton’s subjective assessment of a company’s likely success. Instead of providing investors with accurate overcollateralization ratios, Tilton and Patriarch Partners allegedly wait to lower a fund asset’s category until Tilton decides not to support a failing company any longer. This leaves investors with no valid assessment of the worth of their investment and gives Tilton and Patriarch Partners continued control over the CLO funds and no disruption in management fees.
In addition, Tilton and her firms allegedly deceived investors further with false statements in the Zohar funds’ quarterly financial statements. Although disclosures were made stating that Tilton and Patriarch Partners had conducted the necessary impairment analysis on the Zohar funds’ assets, the analysis allegedly had not been done.
As a result of their alleged breaches of their fiduciary duties, Tilton and Patriarch Partners have collected nearly $200 million in payments and fees that they were not entitled to.
Whistleblowers Notify SEC of Investment Fraud
While Waters & Kraus is not handling this particular example of SEC fraud against investors, we are representing whistleblowers in similar qui tam matters. If you have comparable claims against an employer or anyone else who is selling securities without registering with the SEC, contact us or call our qui tam attorneys at 800.226.9880 to learn more about our practice and how we can work together to notify the government about fraud and abuse. Our qui tam lawyers, like Paul Lawrence, are committed to advancing and protecting financial informants’ interests in whistleblower lawsuits.
