By Dave Solomon
The New Hampshire Union Leader, Manchester.
The investor known as “Diva of the Distressed” is taking on the Securities and Exchange Commission in what she describes as the latest in a series of David and Goliath struggles that have marked her career as one of America’s most flamboyant female entrepreneurs.
Lynn Tilton, whose holdings include the Gorham Paper and Tissue mill in Coos County, announced on Wednesday that she is fighting back against federal charges with a lawsuit against regulatory authorities.
The so-called “Turnaround Queen,” who has built her reputation on “rebuilding American manufacturing one company at a time,” filed suit against the SEC a day after the commission announced proceedings against her and her company, Patriarch Partners, a private equity firm managing 75 companies with revenues in excess of $8 billion.
In the suit filed in U.S. District Court, Tilton alleges that the process for appointing SEC administrative judges is unconstitutional, and that cases like the one brought against her are more appropriately heard in federal court, where rules of evidence apply and a jury trial is possible.
Tilton’s decision to take on the SEC comes as no surprise to those who have followed her rise to fame and fortune.
Her purchase of the Gorham mill in 2011 was featured on ABC and CBS, with a narrative built around Diane Sawyer’s description of Tilton as one of America’s richest women — “a billionaire turnaround specialist with a flair for Gucci, high heels and black leather.”
At first it appeared that Tilton’s investment in the Gorham mill, including a new, $5 million gas line to power the refitted paper-making machines, was paying off.
But amid high prices for natural gas in 2013 and declining orders from customers, the mill instituted layoffs last year and in December fired a high-profile CEO hired only 18 months earlier. The mill is now on a limited production schedule, when it’s running at all.
That’s a far cry from the “three shifts running around the clock, with 175 new workers” featured in the ABC report four years ago.
During the 2011 broadcast, Tilton is seen touring the Gorham factory in a hard-hat, shrugging off warnings from her tour guides with characteristic bravado. “You think you’re going to scare me, honey?” she says.
On Wednesday, Tilton took her hard-charging style to the airwaves, telling CNBC that her fight was like the Biblical story of the shepherd and the giant.
“I’ve had many David and Goliath battles, this is not my first one, and I have never had an adjudication against me because I fight for truth,” Tilton told the financial news network. “After five-and-a-half years of investigation, unleashed subpoena power and one-sided testimony, not to give me a chance to have the means and the time to defend myself seems unfair and inequitable.”
The SEC announced on Monday that it was initiating a hearing before an administrative judge on charges that Tilton and Patriarch Partners defrauded investors by hiding the poor performance of assets in loan funds, collecting almost $200 million in questionable fees.
At issue is Tilton’s management of Patriarch’s “Zohar Funds,” which raised more than $2.5 billion from investors over the past decade to make loans to distressed companies like the Gorham mill.
Some of the companies, however, failed to perform well and did not make some or all of the interest payments over several years. The SEC claims that Tilton concealed the poor performance by filing false financial reports.
“Tilton and Patriarch strongly believe that the most fair and appropriate forum for this complex, five-year-old matter is U.S. District Court, and they urged the SEC staff to bring their case in that forum,” said a Tilton spokesman.
Tilton’s attorneys are seeking an injunction against the SEC proceedings, and a court order to move the case to U.S. District Court because “tens of thousands of jobs and more than $2 billion in debt is at stake.”
Her attorneys said the Patriarch investment strategy was to acquire distressed companies and turn them around over several years.
Because the properties were often not profitable, they often had difficulty paying interest on loans, especially after the global financial meltdown. Patriarch frequently deferred or forgave interest for companies that couldn’t make payments.
“This was fully disclosed to note-holders,” according to the Patriarch lawsuit.
The lawsuit claims the SEC has been arbitrary in handling Tilton’s case as an internal matter, when the majority of similar cases are heard in District Court.
Tilton not only wants to have her case transferred, she is seeking a jury trial and challenging the entire system by which administrative judges are appointed and granted tenure.
If her request for an injunction against the SEC action is not quickly granted by a judge in the U.S. District Court, Southern District of New York, the SEC hearings will proceed.
John Coffee, a Columbia Law School professor and securities regulation expert, told CNBC he believes the Supreme Court would have to overturn a part of the Dodd-Frank financial regulations for Tilton to prevail, given legal precedent around administrative law judges.
“It (the Tilton lawsuit) might have some ability to get them a favorable settlement, but I don’t think it has a good chance of succeeding in court,” Coffee said.