by Kyle Younker
Lynn Tilton and her private equity fund Patriarch Partners have been subject to multi-year investigations conducted by the Department of Justice and Department of Defense, according to a source familiar with the matter along with declarations filed by SEC lawyers in the commission’s administrative proceeding against Tilton over fraud allegations.
The declarations, which were filed on 3 November and say investigations are ongoing, were removed from the docket shortly thereafter, but reappeared today following Debtwire inquiries to the SEC.
Reports of DOJ investigations into Tilton previously circulated in 2014 in relation to her employing a former government official who had awarded contracts to portfolio company MD Helicopters. But the recent suggestion by the SEC that investigations are ongoing is particularly relevant now that equity stakes in and debt issued by some Zohar I CLO companies are set to change hands at auction. Moreover, fallout from any government investigation could have implications for disputes over boardroom and executive control of those companies.
The SEC declarations stem from a discovery dispute in which Gibson Dunn, in representation of Patriarch, pressed the court to make available evidence that could bolster its defense of Tilton. The SEC’s response, which included the 3 November declaration by SEC attorney Brent S. Mitchell, stated that interagency documents are shielded from discovery, citing various law enforcement process privileges.
Those interagency documents stretch as far back as 2012, and relate to communications between SEC attorneys, DOD investigators, and lawyers from the US Attorney’s office. In an explicit example, four documents on the privilege log from mid-2015 create a chain of emails between an SEC representative and two assistant US attorneys from the Southern District of New York arranging communications “regarding the DOJ’s investigation of Respondents Tilton and Patriarch Partners.”
Other entries on the log allude to requests from DOJ and DOD investigators for access to the SEC’s confidential investigation records.
In its request for privilege, the SEC asserts that, for many of the documents, disclosure could “harm the Commission’s, the DOJ’s, and the DOD’s on-going law enforcement interests” by revealing what the agencies know, “what evidence they consider to be important, and their theories and strategies in the ongoing investigations and any enforcement action that might arise from those investigations,” according to the Mitchell declaration.
Disclosure could also impair the agencies’ “ongoing investigations (and potential future litigation in these matters) by revealing confidential law enforcement techniques and procedures,” Mitchell continues.
Gibson Dunn, however, issued a statement to Debtwire this afternoon denying DOJ and DOD investigations. “There is not now and has not been any ‘active’ or ‘ongoing’ DOJ/USAO or DOD investigation of Patriarch Partners or Lynn Tilton,” the statement reads. “Any misreading of the SEC’s privilege log or related declarations as supposedly substantiating any such thing is false and defamatory.”
The lengthy statement from Gibson Dunn is posted in full at the bottom of this story. The DOD and SEC declined to comment. The US Attorney’s Office did not respond to requests for comment.
In its proceeding against Tilton, the SEC alleges she committed fraud in managing the three Zohar CLOs by hiding losses from investors and pocketing fees. Administrative Law Judge Carol Fox Foelak is expected to rule on the matter early next year.
An auction for the collateral backing the defaulted Zohar I CLO was delayed earlier this week in light of new information related to the assets up for sale.
Meanwhile, even as the SEC attorneys defend the shielding of the interagency documents in part due to what they refer to as “ongoing investigations,” Judge Foelak ruled that some of their asserted grounds are “doubtful,” and that the SEC office “provides no reason to believe that any investigation is, in fact, ongoing.” Nonetheless, she ruled in favor of the SEC and against document production, stating that the documents don’t contain relevant evidence.
At least one of the Zohar portfolio companies, MD Helicopters, has done extensive business with the DOD, and has been proximate to the federal investigations. A former MD executive and retired Army colonel, Norbert Vergez, pleaded guilty last year to negotiating a job at MD Helicopters while still employed by the DOD. Vergez was a former program manager for the Army’s Non-Standard Rotary Wing Aircraft office, which purchases aircraft for foreign allies, including from MD.
In a statement at the time, Patriarch noted it cooperated with the DOD’s investigation, and that Vergez’s plea deal did not contain allegations of misconduct by MD Helicopters or Patriarch.
A 2012 report from the DOD inspector general found that the non-standard program, which had been consolidated in Huntsville, Alabama under then-Deputy Defense Secretary Ashton Carter, “did not adequately manage the acquisition and support” of aircraft, and “may not have achieved the best value for the more than USD 1.6bn” it had spent at the time.
The SEC notice that the investigations continue could heighten conflicts over control of corporate boards and equity ownership of the underlying Zohar companies. Holders claiming majority equity ownership in three Zohar companies sued Tilton earlier this week in an attempt to have their board members recognized. A criminal case would potentially give oppositional Zohar holders a stronger argument in favor of their management and board choices, and for removing Tilton as CEO of the many companies she still controls.
The aforementioned statement from Patriarch/Titlton counsel Gibson Dunn reads as follows:
“There is not now and has not been any ‘active’ or ‘ongoing’ DOJ/USAO or DOD investigation of Patriarch Partners or Lynn Tilton. Any misreading of the SEC’s privilege log or related declarations as supposedly substantiating any such thing is false and defamatory. The SEC was required in our case to produce all inter-agency communications going back several years and responded with a privilege log detailing any such inter-agency communications, yet the only references on its log to DOD communications ceased by April 2015, and the only references to DOJ/USAO communications were in the three-month period immediately after the SEC filed civil charges against Tilton and Patriarch at the end of March 2015. As any sophisticated party would understand, obviously there cannot have been any ‘active’ or ‘ongoing’ DOJ/USAO or DOD investigations here when there have been so few communications between these government agencies, over such a short period of time, and none since mid-2015. Indeed, the SEC ALJ who reviewed each of these documents in camera expressly found that they did not evidence any ‘active’ DOJ/USAO investigation. And to our knowledge as trial counsel that just defended Tilton and Patriarch against the SEC’s civil charges and exposed them as baseless, there is no such DOJ/AUSA investigation. Nor are Tilton or Patriarch being investigated by the DOD. In fact, in the DOD investigation to which the SEC privilege log referred, Tilton and Patriarch cooperated with DOD’s investigation and prosecution of an Army colonel (Norbert Vergez) that ended in his conviction in mid-2015. So it is wreckless [sic] and irresponsible for this publication to print such false and defamatory allegations.”