The woman and her company that drove legendary fire apparatus builder American LaFrance into bankruptcy and closure early last year have been charged with fraud by the federal Securities and Exchange Commission (SEC).
The SEC’s enforcement division alleges that Lynn Tilton, the head of Patriarch Partners and its branches breached fiduciary duties and defrauded clients by misleading investors about the value of assets in financial statements and failing to value assets using the methods described to the clients.
Further, the SEC accuses the flamboyant investment advisor and entrepreneur, known as “The Diva of Distressed,” of hiding the poor performance of loan assets in three collateralized loan obligation (CLO) funds she and her company manage.
Tilton, 55, known for purchasing distressed companies and turning them around, bought the financially troubled American LaFrance in 2005, taking it over from Freightliner. The company opened lavish facilities in Summerville, S.C. in 2007. A year later, ALF filed for bankruptcy in 2008 citing $100 million in debt, and in January 2014, it closed the doors at its facilities in Moncks Corner, S.C. Last August, ALF’s assets were auctioned off to pay creditors.
“We allege that instead of informing their clients about the declining value of assets in the CLO funds, Tilton and her firms have consistently misled investors and collected almost $200 million in fees and other payments to which they were not entitled,” said Andrew J. Ceresney, Director of the SEC’s Enforcement Division. “Tilton violated her fiduciary duty to her clients when she exercised subjective discretion over valuation levels, creating a major conflict of interest that was never disclosed to them.”
Barbara Laidlaw, a crisis and issue management specialist at Edelman, a New York-based public relations firm, is a spokesperson for Patriarch Partners and issued a statement via email defending her client.
“We are disappointed that the SEC has chosen to bring an enforcement action that is ill-founded and at odds with Patriarch’s investment strategy, which was consistently disclosed since the inception of the funds,” Laidlaw said in the statement. “We look forward to the opportunity to vigorously defend ourselves against the SEC’s allegations.”
According to the SEC, the three funds managed by Tilton and the Patriarch Partners firms are collectively known as the Zohar funds, and more than $2.5 billion has been raised from investors. Tilton’s investment strategy for the Zohar funds has been to improve the operations of the distressed portfolio companies so they can pay off their debt, increase in value, and eventually be sold for a profit.
The SEC alleges that rather than following the required methodology for valuing CLO loan assets, Tilton and her firms maintained control over the funds and preserved management fees by not lowering asset’s category until she decides to cease financial support of the distressed company.
Such may be the case regarding American LaFrance which abruptly, and indefinitely, closed and its doors on Friday, Jan. 17, 2014, with virtually no notice to employees who were told to take their personal belonging and don’t come back on Monday.
The closure affected hundreds of employees in Moncks Corner, S.C., Los Angeles and at the former Ladder Towers Inc. (LTI) complex in Ephrata, Pa., all part of the last American LaFrance incarnation. Several fire departments did not receive apparatus that had been placed on order, but never completed or delivered.
A news release from American LaFrance was issued the day the company closed stating: “Unfortunately, the company’s unexpected current financial condition requires the discontinuation of operations in these locations at this time and these facilities are not expected to reopen.”
Indeed, the doors were to never reopen, except to conduct an auction on Aug. 27, 2014, to liquidate the assets of the defunct truck builder. At the time, it was said there was $8 million of inventory to be sold in over 1,200 individual lots representing 2.5 million parts.
The auction was ordered by Berkeley County, S.C., to recoup delinquent taxes.
American LaFrance is one of the oldest and most storied names in fire trucks. It started in 1873, the company has roots that go back even further to 1832 with processor companies that built horse-drawn apparatus.
In the early 1990s, American LaFrance sort of petered out and ceased operations until it was bought in 1995 by Freightliner, which was owned by Daimler Chrysler.
ALF was sold to Tilton and Patriarch Partners in 2005 in closed in 2014.
It remains to be seen what happens to the ALF name and whether it can be resurrected yet again.
