Tilton's CLO strategy is like "a beauty pageant and the judges are the parents of the contestants," an observer says. (Photo: AP)

Lynn Tilton is a study in contradictions.

The 55-year-old is a philanthropist for women’s causes who named the buyout firm she founded Patriarch Partners LLC and mailed out Christmas cards of herself dressed in lingerie. A buyer of old-economy businesses such as clothing retailer Spiegel LLC and map maker Rand McNally & Co., Tilton nevertheless embraced new and complex forms of debt to fund her companies.

It’s those financing methods that are now in the spotlight after the U.S. Securities and Exchange Commission accused her on Monday of crossing the line. The agency said Tilton overcharged investors almost $200 million on fees she collected on $2.5 billion of collateralized loan obligations, or CLOs, she created to help fund her various businesses. Tilton’s representatives said the allegations are “ill-founded.”

At the heart of the SEC’s case is how Tilton valued the loans to companies she or Patriarch controlled that were later bundled into CLOs and sliced up into securities of varying risks. The SEC says some of the loans should have been written down — and the fees charged investors to manage the CLOs lowered — since many of the companies made no interest payments, or only partial payments. It’s not typical for loans backing a CLO to be made to companies run by the same operator. It’s also rare for that operator to also manage the CLO.

“It’s highly unusual to have a CLO that’s concentrated in any one owner,” said Lawrence Golub, the chief executive officer of lender Golub Capital Partners in New York. “It’s like having a beauty pageant and the judges are the parents of the contestants.”

Tarnished Career

The SEC allegations threaten to tarnish Tilton’s 30-plus-year career on Wall Street. Before the single mom became known as the “The Diva of Distressed” through a short-lived reality television pilot on the Sundance Channel, Tilton was a nationally ranked teenage tennis player in Teaneck, New Jersey, a banker for Goldman Sachs Group Inc. and a Merrill Lynch & Co. distressed-debt trader.

“We are disappointed that the SEC has chosen to bring an enforcement action that is ill-founded and at odds with Patriarch’s investment strategy, which was consistently disclosed since the inception of the funds,” Barbara Laidlaw, a Patriarch spokeswoman at Edelman, said in an e-mailed statement. “We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.”

‘Fighting for Truth’

While Laidlaw declined to make Tilton available for an interview, the investor and her firm sued the SEC in Manhattan federal court Wednesday, saying its pursuit of fraud claims violates the Constitution. She is seeking to block the agency from pursuing its case in administrative court, where there’s no jury and discovery is limited.

“One of the things you learn about being a warrior and fighting for truth is that you keep marching forward in the darkness every day until you see the light,” Tilton said in an interview with CNBC on Wednesday. “I’ve had many David-and-Goliath battles — this is not my first one — and I’ve never had an adjudication against me because I fight for truth.”

Unless Tilton can reschedule payments, as she has in the past, this year she and Patriarch will have to start paying back the $2.5 billion borrowed through the three CLOs, which are Zohar named I, II and III. The term Zohar refers to the writings guiding the Jewish mystical tradition of Kabbalah.

Withdrawn Ratings

Moody’s Investors Service cut the credit ratings on the CLOs in 2011 and again in 2013 because of mounting defaults, and it’s since withdrawn its ratings because it said it wasn’t getting enough information on Tilton’s businesses.

The $532 million Zohar I, assembled in 2003, comes due starting in November. The $1 billion Zohar II matures in January 2017, and the $1.01 billion Zohar III in April 2019. Pieces of the third Zohar CLO were recently trading at about 71.5 cents on the dollar, according to Empirasign Strategies.

Through a spokesman, Tilton said Wednesday that she now owns more than two-thirds of Zohar I. Bond insurers led by a unit of MBIA Inc. are on the hook for much of the rest after agreeing to guarantee investors against losses when the securities were sold.

The looming maturities will be a reckoning for Tilton, who founded New York-based Patriarch in 2000 and who, as its chief executive officer, owns at least 39 companies, according to data compiled by Bloomberg. Many of those she bought on the brink of failure. By her count, Tilton rescued more than 250,000 jobs that would have been lost in liquidation if she hadn’t come along with her checkbook.

Tilton’s Companies

Besides Spiegel and Rand McNally, other companies in Patriarch’s portfolio are Jane Cosmetics, which Tilton bought in 2009 and refashioned as a philanthropic giver to victims of domestic abuse; the MD Helicopters Inc. business once owned by billionaire recluse Howard Hughes; and Black Mountain Door LLC.

Tilton told the Wall Street Journal in 2013 that she started Patriarch to “prove that making money and making the world a better place weren’t mutually exclusive.”

When Tilton bought Maine papermaker Old Town Fuel & Fiber in 2008, she was hailed for giving the business a second chance, according to Duane Lugdon, a representative for the United Steelworkers who negotiated salary cuts with Tilton.

Once profits started to decline, however, Tilton cut spending, making it difficult for the pulp mill to run because of a lack of raw fiber, Lugdon said. Tilton sold the more than 100-year-old company in bankruptcy in November.

Still, Lugdon said he respects Tilton. “In all of her dealing with us, whatever she told us, she followed through on,” he said.

Increased scrutiny hasn’t softened Tilton’s brashness. Even though the SEC began asking for information on the Zohar funds about five years ago, in the 2011 pilot episode of “Diva of Distressed” she professed to love the companies she ran more than the men she dated.

“It’s only men I strip and flip,” Tilton said. “My companies I keep long-term and close to my heart.”

— Check out Distressed Debt Maven Lynn Tilton Charged With Fraud by SEC on ThinkAdvisor.

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