Lynn Tilton seems to love the limelight – when it focuses on promoting a narrative about her ability to use distressed debt investing and corporate restructuring to create billions in revenue and hundreds of thousands of jobs. But turning the spotlight to the deep corners of the purported billionaire’s corporate empire paints a very different picture of job loss, aggressive corporate tactics, and relentless litigation against many of those who cross the larger-than-life executive.
There was the time when one of Tilton’s companies attempted to bolt to Mexico under the cover of darkness with plant machinery it did not own. Or the time another Patriarch Partners-owned company, MD Helicopters, came under federal inquiry, and then company executives conducted a campaign to root out employees that were suspected of cooperating with investigators. Or when Patriarch devised shell entities that allowed them to avoid paying its financial advisors – just one of the numerous times that Tilton used shell companies and bankruptcy courts to spin out valuable assets and leave vendors grasping at straws. Or the many times that countless workers – and their benefits – have been left unpaid following abrupt facilities closures.
Tilton, the founder and CEO of Patriarch Partners, is facing down fraud allegations from the SEC and two high-profile groups of collateralized loan obligation (CLO) investors. Patriarch was the collateral manager for the Zohar CLOs – three issues of collateralized loans backed by a pool of debt to middle market companies – that were issued in the mid-aughts.
Tilton’s defense against the most recent fraud claims will likely come from an array of lawyers and public relations crisis managers who will tout her main claim to fame – more than a decade of acquiring companies left for dead and turning them around, saving jobs at iconic American businesses.
Yes, there are some success stories, like Performance Design Products and Snelling Medical Staffing, which generate stable earnings and have stayed out of bankruptcy or foreclosure. But those are in stark comparison to the cross section of portfolio companies that have been in and out of bankruptcy, experienced abrupt shutdowns, or been the platform for acrimonious court disputes.
While regulatory and investor cases against Tilton have been widely publicized, the events that unfolded at the underlying Zohar-controlled companies have been left mostly in the dark. In fact, because the securities were “blind” funds – meaning the identities of the portfolio companies to which the CLOs extended loans were not made available to investors – even the investors themselves didn’t know until recently where their money was allegedly going. (To be sure, they still don’t really know where it went.)
And because Patriarch used the USD 2.5bn in CLO proceeds to acquire mid-sized businesses often in small, industrial American towns, press coverage of their demise and the related court proceedings has been sparse and atomized.
When you peel back the layers on many of the companies, what emerges is a picture of a CLO-backed private investment firm gone bewilderingly awry. Based on interviews with former employees and a Debtwire Investigations analysis of a profusion of documents churned out in dozens of court cases, there are repeated incidents of asset transfers and bankruptcy filings seemingly designed to avoid paying vendors; aggressive lawsuits against former employees; abrupt facilities closures that left workers jobless with unpaid benefits; and companies starved of cash, even as Patriarch and Tilton continued to pay themselves.
“When you invest in distressed companies, you expect some wins and some losses, but if you take money out of the companies to pay yourself at the same time that you are not paying vendors and are firing employees, you are asking for trouble,” said Erik Gordon, a professor at the University of Michigan Ross School of Business and Michigan Law School. “It is a strange mess.”
The Patriarch-managed Zohar CLOs have long been criticized for lack of transparency and Patriarch’s self-dealing. Zohar I and Zohar II both defaulted upon their respective maturities in 2015 and 2017, and are now owned by MBIA, which provided insurance on the CLOs. The Zohar III, which MBIA did not insure, matures in 2019.
Debtwire analyzed court proceedings related to 93 entities listed as Zohar collateral from two public sources – a financial analysis done by Houlihan Lokey for MBIA; and a lawsuit brought by Norddeutsche Landesbank and Hannover Funding Company, two of the original Zohar CLO investors. The number of US federal cases involving Patriarch or Tilton amount to approximately 700. The jurisdictions stretch from Washington State to Maine, and there are dozens more local cases across Arizona and Ohio, where some of the Zohar companies have operations.
Further, Debtwire spoke to 12 former portfolio company executives, Patriarch employees, and business associates who corroborated the patterns of behavior spanning multiple portfolio companies. The people interviewed asked to remain anonymous out of fear of retaliatory lawsuits by Tilton, citing prior threats to sue former employees for speaking out.
Over the years, Tilton has claimed that Patriarch has been responsible for creating hundreds of thousands of jobs. Debtwire analyzed these claims. Based on publically available information from form 5500 labor filings, first day bankruptcy declarations, news reports, and statements from company executives, the companies employed approximately 40,000 people at or near the time of Patriarch’s acquisition. In the most recent available data, the companies employ approximately 24,000, or a 40% reduction.
CLICK HERE to see the results in PDF format.
Tilton is also no stranger to legal entanglements with journalists. She has filed a defamation suit against Debtwire in connection with its reporting on a public SEC declaration that discloses federal investigations of Tilton and Patriarch Partners. Debtwire has filed a motion to dismiss which has yet to be ruled on.
Prior to publication, Debtwire provided Patriarch’s outside PR firm Brunswick Group with a detailed account of the planned article in its request for comment. Brunswick responded by characterizing the article as “baseless, factually incorrect, and deeply damaging.” Debtwire asked Brunswick to point out any fact that was incorrect, but Brunswick did not respond.
Lawyers for Tilton and Patriarch previously threatened a Forbes reporter back in 2011 when that publication began probing Tilton’s wealth claims, according to a Forbes article at the time.
‘Dance with the gorilla’
As an acquirer of distressed assets, one of Patriarch’s signature strategies is to try to return companies to profitability by rolling them up with other operators, reducing headcount, and shipping jobs overseas to save on labor costs. And Ohio has been fertile ground for Patriarch to acquire downtrodden companies and squeeze the juice out of them.
In one example, Tilton and the interim CEO at Zohar Waterworks, a water cooler maker, even attempted to decamp to Mexico with rented machinery.
It was early in the morning of 16 February, 2007, when executives at Marcus Adams Capital (MA) say they awoke to panicked phone calls. MA, a property and equipment manager, had planned to hold an auction of manufacturing machinery in Columbus, Ohio the following week. Potential buyers were flying in from all over the country. But on the other end of the line was the liquidator commissioned to lead the auction – and he was highly upset. Some of the plant equipment had been placed on trucks, and those trucks were heading toward Mexico.
MA had been locked in a contract dispute with Columbus-based Waterworks, a company acquired by Patriarch in 2005. At issue was a building and equipment lease known as a “net” or “triple net” contract entered into by Zohar Waterworks, which requires a commercial tenant to assume responsibility for the repair and maintenance of the facilities. Even after taking note of the building’s conditions, including a leaky roof in need of repair, Tilton and her advisors still signed the lease, according to a complaint filed in Ohio by MA.
But the company didn’t plan to leave the assets in Ohio. As part of Zohar Waterworks’ strategy to stem its cash bleed, they planned to move operations, including some of the Columbus-based plant machinery, to a facility in Monterrey, Mexico – without the approval of MA, court documents and a source familiar with the situation claim.
Meanwhile, MA set in motion a plan to sell at auction the unused machinery from the Columbus facility, but they encountered resistance from Waterworks’ interim CEO, Patriarch managing director John Harrington – one of Tilton’s top lieutenants, now the CEO of Hussey Copper.
In response, MA filed for a temporary restraining order to ensure the auction would go forward. In doing so, MA and its lawyers learned for the first time that some of the equipment was heading toward Mexico. On 16 February, 2007, MA was granted a second restraining order, and the trucks carrying the machinery were turned around in south Texas.
An email to a fellow Patriarch employee that was presented at trial reveals a cocksure Harrington, later, at the auction. He had struck up a conversation with one of the auctioneers. “I was talking to Frank Rome on the auction floor. […] He was complimenting us on taking the equipment, he thought it was a gusty [sic] move. Some people enjoy it when you put their bosses [sic] balls in a vice.”
Following the attempted equipment grab, MA sued Zohar Waterworks for damages, and eventually won a USD 5.74m judgement, including legal fees – but not before Waterworks and Patriarch threw up a “truculent and resistive” defense in the case, as characterized by the Ohio magistrate.
The dispute was described in court as a “dance with the gorilla” – a simple breach of contract had devolved into an “all hands on deck case” because MA’s assets almost disappeared “into unknown regions of the world,” the magistrate wrote. “The court finds this a complex case only in view of how this case was out-sized by litigiousness.”
Eventually, Tilton put Zohar Waterworks into bankruptcy in 2009, citing the pending judgment from MA. However, the judgement was imminent in March of that year, and Patriarch delayed filing until April in order to perfect its security interests and gain control of the bankruptcy process as a secured lender, MA says in its complaint. In fact, Delaware bankruptcy judge Brendan L. Shannon preserved MA’s right to sue – and the parties didn’t settle the claim until four years later, in September 2013.
The Waterworks case also offers a glimpse into Patriarch’s position on multiple sides of a deal. Patriarch entities collect fees as the collateral manager for the Zohar funds, as administrative agent for the Zohar funds, as the company manager, and, sometimes, through the equity or preferred equity positions of the Zohar funds.
“The interest and management fees always needed to be paid,” said one former employee who worked with Patriarch at multiple companies. The same source claimed that the fees and interest were managed centrally and arbitrarily by Tilton, and sometimes turned up to unsustainable levels, draining companies of cash.
Shell it out
Elsewhere in Ohio in 2005, another Patriarch-owned company engaged in similar tactics to leave vendors behind – this time involving shell games with an advisory firm.
WW Holdings, a door and hardware company acquired by Patriarch out of bankruptcy in 2004, sought business turnaround advice from advisors at XRoads, racking up a bill of USD 1.8m for operational assessments and other services.
But WW Holdings refused to pay. In response, XRoads sued the company in the Southern District of New York. Later, after unsuccessfully moving twice to have the case dismissed, Tilton and Patriarch transferred the company’s valuable assets into two newly created entities – Ark One and Ark II – along with selected liabilities. Patriarch then left XRoads’ claim (and the claims of other vendors they no longer needed) at a new shell company, and quickly moved to have that shell company dissolved, according to the XRoads complaint.
The parties eventually settled. But in the meantime, Patriarch began shutting down WW Holdings’ operations in Ohio, and, again, moving them to Mexico, leaving hundreds of displaced workers, according to local press reports. Local unions slammed the closures for lack of proper notice to steelworkers in violation of the federal WARN Act and for the negative economic impact it had on local communities. And at the time, a local union representative spoke out in local newspapers about how the company was nickel and dimed by Patriarch: when plant equipment broke, the company refused to purchase new parts or invest in repairs.
“These were good middle class jobs,” said US Rep. Tim Ryan of Ohio in an interview with Debtwire. Ryan sent a letter to the US Department of Labor after the health coverage of some retirees was cancelled in 2009, even though the premiums had been deducted from the retirees’ paychecks.
“It was like salt in the wound after the abrupt way it was closed down,” Ryan said.
At Rapid Rack, a California-based provider of quick-assembly tables and shelving, the company accrued debts with a Chinese supplier called Zhongda, and again faced off with them in a multi-year court battle.
In court filings, Zhongda alleges that Rapid Rack was habitually late in remitting payments for products delivered by Zhongda. And through testimony from Rapid Rack executives, Zhongda lawyers discovered that Patriarch was “siphoning away” funds from Rapid Rack at a time when Rapid Rack was claiming that it couldn’t pay its debts. They did so “with seemingly little regard by Patriarch to Rapid Rack’s shaky financial position,” Zhongda says.
In one poignant case exhibit, a China-based Zhongda employee tells a Rapid Rack employee via email that he needs the money to pay his workers. “[No] money, we will die,” the missive says.
Rapid Rack eventually lost the judgement. But as the case plodded on, Rapid Rack’s valuable assets were transferred to a new entity called Silverack.
“Some of the companies are essentially receiving goods and services for free, or cherry-picking which vendors they pay,” said another source familiar with Patriarch’s business practices. “You don’t really need a sound business model when you don’t have to pay your vendors.”
The list of shuttered Zohar companies with unpaid claims from vendors and taxes goes on, from American Lafrance to Petry Media to Old Town Fuel & Fiber.
Employees under fire
Perhaps one of the overlooked aspects of the Patriarch saga is the aggressive stance the company has taken against some current and former employees, with some of the most demonstrative examples occurring at MD Helicopters, a Mesa, Arizona-based maker of helicopters.
Kathy Rupp, a 30-year MD veteran, was there on 23 August, 2013, when the company and Patriarch received a formal investigation notice from the Department of Justice, she recounted in an interview with Debtwire. An investigator from the Defense Criminal Investigative Service, Lance Stamper, was looking into, among other things, potential conflict of interest violations stemming from Tilton’s courtship and eventual hiring of Army colonel Norbert Vergez, according to multiple sources familiar with the investigation.
The Associated Press wrote a detailed story on the scope of the investigation in early 2014.
In the days after the inquiry began, both Rupp and another colleague, Cherie Erickson, spoke with Stamper, expressing concerns about helping with the investigation, Rupp said. She added that they worried about retaliation from Tilton, who is also the CEO of MD. But the women agreed to cooperate by providing internal company documents directly to Stamper or through Philip Marsteller, another MD employee who was fired when the government notice arrived.
In their conversations, Stamper assured Erickson and Rupp that providing documents would not violate their non-disclosure agreements. However, they became concerned when MD began a campaign to root out any cooperating employee.
That fall, Erickson observed her direct supervisor, MD general counsel David Ruppert, reviewing documents in his office and shredding them, Erickson said in court papers.
Another co-worker, contracts manager Wendi Tufts, brought documents to Erickson from Ruppert with instructions to “look through the files for notes and to shred them.” But after discussing the request, Erickson and Tufts decided they would not destroy the documents, and instead preserved them in the bottom of Tufts’ filing cabinet.
During that period, Rupp and other employees were interviewed by lawyers from the powerful Washington, D.C.-based law firm of Williams & Connolly, who were working on behalf of the company.
All told, at least eight employees resigned or were pushed out from MD around the time of the investigation, many of whom had expressed opposition to the Vergez hiring. Erickson was fired in August 2014. Rupp lasted all the way until April 2015 before she was fired, funneling documents out the whole time.
She was like a “mouse in the corner that no one suspected,” Rupp recalled.
But her problems didn’t end there. In characteristic fashion, the firings culminated in a web of litigation and whistleblower complaints.
MD, with the help of Williams & Connolly, filed a lawsuit against Rupp and Erickson in Arizona superior court, alleging they had breached contractual terms when they took possession of MD documents. MD also sued Philip Marsteller for retaining confidential documents. The cases are ongoing.
For their part, Rupp and Erickson filed a qui tam whistleblower complaint against Tilton, Patriarch, and MD, while Rupp filed a whistleblower reprisal complaint.
Marsteller sued MD to recoup wages and commissions he’s owed. Additionally, Marsteller and Robert Swisher, another former employee, filed a qui tam complaint under the false claims act in Alabama against Tilton, Vergez, Patriarch, and MD. Though a district judge threw out their complaint last year, a panel of Atlanta-based appeals court judges heard oral arguments in the case three weeks ago. And following a Supreme Court ruling last year, Department of Justice lawyers filed an amicus curiae and presented oral arguments that bode well for Marsteller and Swisher.
Ruppert, the general counsel, was fired in January 2014. In a wrongful termination lawsuit he filed against MD, Ruppert detailed how company officials, in their efforts to find the government whistleblowers, undertook background and financial investigations of suspected collaborators, reissued confidentiality agreements, and conducted physical security sweeps of the MD facilities in search of listening devices.
Vergez, who had managed contracts for MD while employed at the US Army’s foreign military sales office in Huntsville, Alabama, later pleaded guilty to negotiating his employment and receiving a signing bonus and other gifts from MD while he was still employed by the Army. In 2016, he was sentenced to five years’ probation and a USD 10,000 fine.
Tilton was not charged. At the time of Vergez’s sentencing, Patriarch issued an email statement to the Associated Press, in part claiming it and MD had cooperated with the government investigation.
Beyond the MD Helicopters employees, multiple company executives have been targeted in lawsuits and firings. In many cases, former Patriarch managing directors and company executives are fired, denied their severance packages and equity rights, and then sued or threatened with lawsuits for alleged wrongdoing.
At Stila Styles, Tilton sued the former chief commercial officer, Menal Parikh, with whom she had had a close working relationship.
Parikh was terminated for “failure to substantially perform material duties,” and had found a new job at Lime Crime. She had refused to agree to certain terms of a separation agreement, and her equity accord with Stila was subsequently terminated. Stila and its lawyers began sending letters to her new employer, accusing Parikh of disparaging Stila, inducing Stila employees to leave the company, and improperly sharing confidential information, Parikh alleged in court filings related to a countersuit.
Also in 2014, Tilton sued Olindo Malizia, the former CEO of American Lafrance, making accusations similar to those in the case against Parikh. Malizia was accused of disparaging the company, interfering with its then-current employees, and misappropriating confidential information.
Remarkably, Patriarch carried the case forward even though American Lafrance had abruptly closed in January 2014 and was in the process of liquidating its assets.
Several portfolio company CFOs were fired for refusing to sign financial opinion statements without reviewing the actual financial records, according to an affadivit from George Priggins, a former Patriarch managing director. Priggins goes on to state that, after pushing the executives out, Tilton would accuse them of wrongdoing “in order to justify her actions in denying them the bonus and severance payment.”
Priggins had filed the affidavit in support of a lawsuit against Patriarch brought by Andrzej Wrobel, another Patriarch MD. Wrobel claimed that Tilton used equity contracts to fraudulently induce potential executives to join the firm, but that no one ever received equity under those agreements.
Wrobel, in his affidavit, claims that Tilton sued Bill Hinz, yet another Patriarch MD, to prevent him from testifying in favor of Wrobel. Hinz asked the local Arizona attorneys for Patriarch, “what are you seeking in this lawsuit against me?” He says they replied: “we don’t really know.”
By 2015, Tilton must have been feeling the heat. In March of that year, the SEC accused her of using a subjective measure to manipulate the overcollateralization test that CLO investors relied on to judge the health of their investments in the Zohar funds. Tilton categorized loans based on whether she subjectively believed the companies could recover, not on how much interest was collected, and in turn was able to charge over USD 200m in fees that would have otherwise gone to investors, the SEC alleges.
Nevertheless, Tilton, who at any given time oversees dozens of court cases and employs an army of lawyers, seems to have a strong stomach for the legal gamesmanship – and the reputed billionaire expends significant financial resources, and the resources of the Zohar companies, to wage the court scraps.
In many ways, the kinds of aggressive lawyering tactics employed by Tilton and Patriarch at the portfolio companies were on full view in the highly public (at least for the financial world) SEC proceeding against Tilton. In that case, Tilton’s lawyers filed 33 motions, compared with just three from the SEC, and forcefully questioned every shred of evidence presented against Tilton.
Tilton’s lawyers argued that she provided adequate investor disclosure, that the indentures allowed her to unilaterally amend loan agreements to waive interest payments, and that, in any case, the SEC court is not a proper venue. Most recently, Tilton’s lawyers filed a motion to stay the SEC proceedings pending the resolution of constitutional challenges to the procedure for appointing the SEC’s administrative law judges. The SEC judge did not grant the stay.
As the SEC case advanced against her, a pair of Zohar investors brought a fraud suit against Tilton for mismanagement of the CLOs, based on information that became available through the SEC proceeding; and MBIA, the controlling party of Zohars I and II, sought to replace Patriarch as the manager of the Zohar funds.
Facing the prospect of losing control of the funds, Tilton began executing dozens of amendments to loan agreements between the Zohar funds and the portfolio companies, according to a complaint filed by the Zohar funds earlier this year. She signed agreements to subordinate Zohar loans to loans made by her personal funds. And she granted herself an irrevocable proxy over many companies in order to maintain equity voting control. One such document, seen by Debtwire, shows the way in which Tilton often signed as every party in a given amendment.
“In effect, these transfer restrictions purport to shift key rights of ownership held by the Zohar Funds to an entity owned and controlled by Ms. Tilton that has no ownership interest whatsoever in the underlying loans to which they relate, all for nothing in return,” lawyers for the Zohar funds wrote. They’re seeking USD 1bn in the lawsuit.
By early 2016, Alvarez & Marsal stepped into the maelstrom as collateral manager, and became quickly enveloped in court battles, including to recover essential documentation from Patriarch, who had refused to hand it over.
Unfortunately for portfolio company workers, 2016 was also a busy year for business closures.
Internationally, Patriarch began a campaign to lay off 900 of 1,300 workers at a Plettenburg, Germany-based plant for Dura Automotive, a maker of components for cars. By creating a new entity, the company was allowed to fly workers in from Portugal to cover weekend factory shifts while the German workers were out during October, 2016 protests. According to local news reports, in order to circumvent German law, the company said the factory belonged to Dura Germany during the week, and that it belonged to Dura Portugal during the weekend.
Operations of Galey & Lord, once one of the largest denim producers in the U.S., had been reconstituted in China and Cambodia. By 2014, roughly 2,000 workers were employed at a Galey Global garment factory in Cambodia -- and in February 2014 those workers had gone on strike to demand over a year’s worth of docked bonus pay. According to local news reporting, by 2016, the Cambodian operations were shut down, and the company had failed to pay its remaining workers their last paycheck.
Back in the U.S., NetVersant closed unexpectedly in 2016 after it lost judgments to employee pension funds that had been shorted. In an affidavit, a former employee states that the company had two “large” contracts and USD 5m in receivables when its doors were closed. The USD 5m in receivables as well as proceeds from the sale of tools and vehicles were absorbed by Patriarch, while pension funds were left behind.
Duro Textiles shut down suddenly in Fall River, Massachusetts, with monies owed to the EPA and myriad retiree and health funds.
And TransCare, an ambulance operator in New York City, tumbled into bankruptcy, leaving 1,700 workers jobless and many unpaid. Patriarch, as the representative of secured creditors in the bankruptcy case, collected USD 800,000 from the trustee, and never distributed it to the Zohar funds, according to court documents. Alvarez stepped in and demanded the money be returned.
TransCare employees affected by abrupt layoffs filed WARN Act suits – for failure to give adequate notice or pay employees before the closure – against Tilton and Patriarch. In one of them, the employees state that TransCare supervisors routinely complained to management that the company’s ambulances were outdated and constantly breaking down, jeopardizing service and valuable contracts. The WARN Act suits are pending.
Still, TransCare was required to pay the monthly management and interest payments to Patriarch. In the summer of 2015, the complaint says, Tilton met with TransCare executives. According to the complaint, she told them: “you pay me first, payroll second, and then I don’t care who else you pay.”
[Editor’s Note: Debtwire Investigations is an editorial initiative brought to you by some of our best and brightest investigative journalists. A rotating team of five beat reporters spend countless hours to focus on long-form pieces, deep data dives, and impactful investigative analysis.]