By Peg Brickley
Oct. 5, 2015
Investors in Lynn Tilton’s funds sued Monday seeking damages for alleged fraudulent misrepresentation and concealment tied to her multi-billion-dollar debt funds.
Norddeutsche Landesbank Girozentrale and Hannover Funding Co. filed a civil suit in state court in New York, seeking damages from Ms. Tilton, her Patriarch Partners LLC and related entities for allegedly misleading them into investing with the financier. The allegations echo those from the Securities and Exchange Commission, which accused Ms. Tilton and Patriarch in the spring of fraud and of hiding poor performance of assets in funds they run, called the Zohar funds. . . .
The Patriarch funds are collateralized debt obligations, which are pools of corporate loans made or purchased with investor funds. They are supposed to be carefully managed baskets of debt securities, the lawsuit says. They “are, in fact, poorly run and incredibly risky private equity ventures,” channeling investor cash into acquisitions of troubled companies.
That runs afoul of the investment agreement, according to the suit.
Patriarch has raised $2.5 billion over the years for its funds, which issue securities and use the proceeds to purchase commercial debt. Investors are supposed to get their money from the proceeds of the loans, which are their collateral.
Patriarch’s debt funds contain hidden losses, due to the firm’s alleged practice of hiding defaults so it can continue to collect fees, according to the SEC and the investor lawsuit. Instead of turning distressed companies around or selling them, Patriarch simply hangs on to them until they fade quietly away, court papers allege.
“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,” according to the investors’ lawyers at Berg & Androphy.