Distressed debt diva Lynn Tilton on ‘unfair’ SEC trial: ‘You don’t believe it could happen’

July 27, 2016

(Reuters) – Lynn Tilton, the flamboyant financier sued by the Securities and Exchange Commission last March for allegedly defrauding investors in three distressed debt funds, accused the commission in an interview Tuesday of depriving her of due process rights.

“Now I know why everyone writes a check” to settle SEC allegations, Tilton said. “Until you are in this situation, you don’t believe it could happen – not to be given the ability to put up a fair fight.”

The SEC brought its $200 million fraud suit against Tilton as an administrative proceeding, which takes place before an SEC-appointed judge under agency-designated rules, rather than as an enforcement action in federal district court, where the federal rules of evidence apply. Tilton’s lawyers have been arguing since before the SEC even filed civil charges that her constitutional due process rights would be violated if the commission opted for an administrative proceeding in her very large and complex case.

After the SEC launched the administrative proceeding, Tilton sued the agency in federal court in Manhattan to enjoin it, challenging the constitutionality of the SEC’s appointment of in-house judges. In June, a divided three-judge panel at the 2nd U.S. Circuit Court of Appeals ruled that Tilton must wait until after the completion of the administrative process to challenge the SEC regime.

The appeals court also lifted a temporary stay on the case before the SEC administrative law judge. Tilton brought in new lawyers from Gibson Dunn & Crutcher, the aggressive defense firm known for its role in Chevron’s Ecuadorian environmental case and the Chris Christie Bridgegate investigation. Both the SEC enforcement division and Gibson Dunn partner Randy Mastro asked the judge overseeing the Tilton proceeding, Administrative Law Judge Carol Foelak, to set a trial date in December.

Instead, Judge Foelak issued an order that the trial begin in October. Tilton and Gibson Dunn contend that date doesn’t give Tilton’s new lawyers enough time to prepare her defense. They argue that the hurry-up trial date favors the SEC, which has been investigating Tilton for more than five years, in an already lopsided proceeding. Late Monday, Gibson Dunn petitioned the SEC commissioners to reset the trial for December.

The dispute over the timing of the trial prompted Tilton to speak out about what she considers the fundamental unfairness of facing potentially ruinous fraud accusations in an administrative proceeding instead of federal court. “I was not under the impression something like this could exist,” she said. “That’s why I have fought so hard to stop it.” According to Tilton’s lawyers, the SEC’s case against her dwarfs the agency’s previous administrative proceedings. In 2015, for instance, the agency collected about $32 million in disgorgement and penalties in all of its litigated administrative proceedings. It is seeking at least $200 million from Tilton and Patriarch.

Tilton said the Patriarch funds and dozens of portfolio companies have already been damaged by the SEC’s allegations that Tilton and Patriarch misled investors in collateralized loan obligation funds about the performance of underlying loans to distressed companies. The SEC claims Tilton and Patriarch charged the $2.5 billion funds about $200 million in unjustified management fees. Tilton and her funds have asked the administrative law judge to throw out what she called “baseless” civil charges.

“When allegations such as fraud are made by the government against an individual, the overhang will always make people look at your reputation differently,” Tilton said. Gibson Dunn has argued that the outcome of the SEC case could affect the tens of thousands of jobs at the dozens of companies in Tilton’s private equity portfolio. “No less than the welfare of these companies and their employees is at stake,” Tilton’s lawyers wrote in their petition to the SEC commissioners.

Tilton’s new lawyers got off to a rocky start with the administrative law judge. When Judge Foelak first set a September trial date, Gibson Dunn’s Mastro responded with an eight-page letter reminding the judge of the case’s high profile. “A perception persists that these SEC administrative proceedings are fundamentally unfair and deny respondents due process,” Mastro wrote. “It is therefore even more imperative that this tribunal be particularly sensitive to such perceptions and concerns and afford us the time necessary and jointly requested to commence this trial.”

Judge Foelak was notably unmoved. She pushed Tilton’s trial date back by a couple of weeks – but also warned Gibson Dunn against filing additional “frivolous” motions. Mastro said in a letter last week that he was “surprised and troubled” by the judge’s warning, which, in his view, only heightened the perception that Tilton isn’t getting a fair shot at defending herself.

“Our ethical obligation is to zealously advocate on behalf of our clients,” Mastro wrote. “Yet now, we face potential sanctions for filing future motions, which could have a chilling effect upon the exercise of our client’s due process rights. Surely, that could not have been Your Honor’s intent, but just as surely, it is the effect.”

The petition Tilton filed Monday asks the SEC commissioners to reconsider the looming October trial date. It also asks that the SEC apply new administrative proceeding rules it adopted earlier this month in Tilton’s trial. The new rules would allow Tilton’s lawyers to take a handful of witness depositions and could bolster defense arguments for a longer wait for trial.

Tilton has asked the 2nd Circuit to reconsider its split decision to allow the SEC to proceed with its administrative case. She is represented at the appellate court by Paul Clement of Bancroft, who entered the case after the 2nd Circuit bounced Gibson Dunn, apparently because one of the judges on the Tilton panel, Robert Sack, was a Gibson Dunn partner before he was elevated to the bench.

In addition to the SEC administrative proceeding, Tilton and the Patriarch funds are facing private litigation in Delaware Chancery Court over the collateralized loan obligation funds.

An SEC representative declined to comment on Tilton’s assertions of unfairness and her petition to the commissioners. In the past several years, the SEC has prevailed in almost every suit in which defendants tried to block administrative proceedings by suing for an injunction in federal court on due process grounds.

(This post has been corrected. An earlier version incorrectly reported that the initial trial date was set for October. It was set for September.)

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