The Triumph of Lynn Tilton

Lynn Tilton and her firm, Patriarch Partners, are known for their high-risk, high-return investments in distressed companies. The Securities and Exchange Commission brought a case against her and the firm claiming that they were using improper valuations, failing to mark down assets when the investment became more distressed. Ms. Tilton chose to fight the charges and had to on the SEC’s home turf. The SEC chose to bring the case as an action in its administrative court’s instead of federal district court.

She fought a two-prong attack. The first was challenging the SEC’s use of an administrative court. The US Supreme Court September denied hearing the appeal of Lynn Tilton in her case arguing that the appointment of administrative law judges was Unconstitutional under the Appointments Clause.

That lead her back to fight her case in front the ALJ. Tilton won her case last week. Administrative Law Judge Carol Fox Foelak dismissed the SEC’s case. The judge concluded that the SEC failed to prove Tilton deceived the highly sophisticated institutional investors in her funds about the finances of the troubled companies in her underlying portfolio.

“I feel truly grateful to Judge Foelak,” Tilton said. “But it doesn’t change my opinion that cases like these belong in federal court. I absolutely feel my rights were compromised.”

According to Reuters, Tilton lawyer Randy Mastro of Gibson Dunn said he filed dozens of motions to obtain discovery that defense lawyers would have been entitled to see under the Federal Rules of Civil Procedure. Most were denied. Nor could Gibson Dunn lawyers depose SEC witnesses. (The SEC changed its rules in 2016 to give more discovery to defendants in administrative proceedings, but the new rules didn’t apply to discovery in Tilton’s case.) At trial, defense lawyers had to cross-examine SEC witnesses without prior knowledge of what they might say.

This is not quite the final say in the matter. Judge Foelak’s initial decision can be overturned by the SEC commissioners. That is part of what currently saves the ALJs under the Appointments Clause. It ultimately comes done to what the Presidentially-appointed SEC Commissioners decide.

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