Leave it to a powerful woman in the investment world like Lynn Tilton to appreciate the value of a fighter and seasoned trial lawyer like Susan Brune. Lynn Tilton, the owner of Patriarch Partners and frequently dubbed the “Diva of Distressed,” is a well-known private equity investor. She invests in companies that are in severe financial distress, with the aim of turning them around to profitability. From 2003 to 2007, she raised more than $2 billion via structured finance vehicles known as collateralized loan obligations (CLOs).
By nature, Tilton doesn’t shy away from a challenge. When the Securities and Exchange Commission (SEC) came knocking in 2009, it was no surprise then that she turned to Brune, an experienced white collar securities lawyer, to represent her during the investigation and then to help her defend against the charges.
In 2015, the SEC charged Tilton and Tilton’s company, Patriarch Partners, with a matter relating to their operation of three CLOs known as the Zohar Funds. The SEC sought approximately $240 million in disgorgement, in addition to fines and a lifetime bar from the securities industry.
The agency chose to file the charges in the SEC’s administrative forum. Tilton decided to take the case to trial, insisting that the highly sophisticated investors had been fully informed about the investments. Going to trial against the SEC is a risk for any client, but in administrative proceedings the odds are particularly stacked against respondents, who have only limited discovery rights and less due process protection than in federal court.
The trial was held before Administrative Law Judge Carol Fox Foelak in October and November of last year. Brune worked closely with co-counsel at Gibson Dunn & Crutcher, which had amassed a large team. Together, they presented a convincing argument on behalf of Tilton. During the trial, Brune did a scathing cross of two fund “victims” and conducted the examination of Tilton when she took the stand in her own defense, testimony that spanned almost four days. The defense that Brune had developed over the years that Tilton had been under investigation played out as planned and led to the dismissal of the case.
In a 57-page order, the judge stated that Tilton didn’t hide anything from her sophisticated institutional investors – thus ending Tilton’s long battle with the SEC. “While respondents did not maximize the ease of finding it, they also did not conceal — omit to state — material information such as the amount of interest actually being paid and the interest rate and principal on the portfolio companies’ loans,” Judge Foelak said in her ruling.
This complete vindication is a huge victory for Tilton and for Susan Brune, who has been fighting alongside Tilton for eight years as the SEC investigated and then filed charges.
“I am thrilled that she has now been fully cleared,” said Brune, whose past victories include the high-profile acquittal of a Bear Stearns hedge fund manager in a federal jury trial.
Like Brune, Tilton was ecstatic to get the verdict. “I have never been one to accept injustice or cower in the face of challenging obstacles, and I knew the truth would ultimately prevail,” Tilton said in an interview. “I can only hope that this vindication will deter the future abuse of power that comes with government overreach.”
“People told me my case would be impossible to win,” Tilton said in post-trial interview on CNBC’s “Power Lunch,” as she reflected on the power of the SEC. And, as she told Bloomberg News, she looked to Brune and Gibson Dunn because they were “willing to get in there and fight.”
I think that before this victory, many would have opined that this was an impossible case to win in the SEC’s administrative court proceeding. Not so, at least with this defense team.