It took the SEC nearly two years after Zero Hedge first warned in September 2003 [13]that something is very wrong with the CLO's issued by Lynn Tilton and her Patriarch Partners, to admit just that.

Recall:
Zombie CLO’s are not Paying-Down – Underlying “Loans” are not True Loans
With absolute power over the whole closed system, as the Zombie collateral manager also controls the equity in the Zombie CLO’s (so much for the purported benefit of the new risk retention rules) and is also the controlling shareholder (in some cases CEO) of nearly all borrowers of Zombie loans and is also the “Agent” on nearly all the Zombie “loans” >>> the “loans” are not really loans. As both borrower and lender, any element of any “loan” can be amended at any time, as needed (maturity, covenants, interest rate, frequency of payment, etc.). Taken to the extreme, we have heard stories of (a) Patriarch Partners companies being liquidated/having substantial assets sold and leaving in-place Zombie collateral loans to a then shell entity devoid of meaningful assets and (b) companies with existing Zombie collateral loans filing for bankruptcy, then selling-to and being repurchased-via additional new Zombie loans, with both the old and new Zombie loans continuing to be held on the books of the Zombie funds. How can this be - who would let this type of circular arrangement without any checks-and-balances persist?
And:
39 Small/Middle-Market Private Portfolio Companies Listed on the Patriarch Partners Website May be Difficult to Sell/Liquidate
- The www.patriarchpartners.com [14] website lists 39 companies (some of which are essentially the same company by a few different names), which we believe contain nearly all of the Zombie funds’ collateral loans.
- Nearly all of these small/middle-market companies seem to be controlled by affiliates of the collateral manager – furthermore, many have limited franchises and continue to operate in distress; these companies may not weather the tumult of protracted uncertainty well (along with no ongoing funding), further limiting potential recoveries.
- The following (also from the Patriarch Partners website) is not what one would expect to read about the portfolio of loans in a CLO: "Although comprised of individual private equity investments, our portfolio of assets is managed as a global conglomerate, with a continued focus on synergies and ventures between companies that will enhance value. The investment funds managed by Patriarch currently hold equity positions in more than 70 companies, approximately two-thirds of which are control positions, spanning almost a dozen industries."
- We understand that nearly 100% of the capital for these 39 portfolio companies came from the Zombie funds, aside from a handful of true first-priority, third-party working capital facilities (asset-based loans/factoring lines, which will also tend to limit Zombie recoveries – a key question is therefore, how much of the meaningful (larger) companies’ equity is owned by each of the Zombie funds (vs. other/personal funds controlled by the collateral manager)?
Then, on March 30, the SEC finally putt the hammer down on the Diva of Distress when the SEC "Announces Fraud Charges Against Investment Adviser Accused of Concealing Poor Performance of Fund Assets From Investors."
The SEC alleged "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.”
Just hours later, knowing well in advance the lawsuit would hit, Tilton countersued the SEC to stop it from pursuing its civil charge, alleging the SEC violated her constitutional rights or something. As Reuters reported, "In a complaint filed in Manhattan federal court, Tilton and her firm Patriarch Partners LLC said the SEC violated the U.S. Constitution by bringing its case in an in-house administrative proceeding rather than in federal court.
Critics of administrative proceedings, which are handled by judges on the SEC payroll, say they can be unfair to defendants because discovery is limited, defense lawyers generally cannot take depositions, and there are no juries.
"I hold hope that our nation will allow a fair fight for truth, to defend integrity and intent against allegations and provides fair forums," Tilton posted on Twitter on Wednesday.
Our nation did not.
As District Judge Ronnie Abrams of the Southern District of New York just opined, the court has no jurisdiction to hear this case, saying that "Congress has created a remedial scheme applicable to claims such as Plaintiffs', pursuant to which the exclusive avenue of review of an ALJ's decisions is through the administrative process, with subsequent judicial review by a federal court of appeals. Plaintiffs are therefore obliged to further litigate their claims in the Commission's administrative forum and seek review, if they so choose, in a circuit court of appeals. Because this Court lacks subject matter jurisdiction to decide the merits of Plaintiffs' constitutional claims, their motion is denied and the Complaint must be dismissed."
And:
Congress has carefully delineated the distinct roles of the Commission and the courts in cases such as this. It rests first with the Commission to determine whether to commence an action at all, and if so, whether to do so in federal district court or in its own administrative tribunal. Having chosen the latter, it rests with an ALJ and then the Commission to rule on Plaintiffs' claims. That decision in tum is subject to appeal to a federal court of appeals. In this Court's view, there is no basis to allow Plaintiffs to bypass this congressionally created remedial scheme. Accordingly, this Court lacks subject matter jurisdiction over this action.
True: after all we are talking about a commission that has decided to never commence an action against a TBTF banker (because that's where the SEC's employees go to work after their drudgery at the dungeon is over) or a HFT firm (because their lobby pays the bills). But when it comes to people like the Diva of Distress, well...
Of course, further litigating her claims in the SEC's forum is precisely what Tilton wants to avoid in her ploy to delay and pull a Greece (i.e., kick the can indefinitely). End result, the court just tossed Tilton's lawsuit.
There is just something about the summer of 2015: it has turned out to be a very bad period for indefinite can kicking. Although she is clearly not giving up:
We're disappointed with Judge Abrams decision that she lacks jurisdiction. We will seek expedited appellate review.
https://t.co/2dSlJx9MR4 [15]
— Lynn Tilton (@LynnTilton) June 30, 2015 [16]
We are hardly the only ones who can't wait for this to escalate all the way up to the Supreme Court.
The full court decision, courtesy of Reuters, can be found on the following link [17].
So in conclusion we leave readers with a clip showing Tilton, who recently retweeted a proposal to become Donald Trump's running mate which would be just delightful...
@LynnTilton [18] you should be @realDonaldTrump [19] running mate. Run the country like a business
— rodney raanan (@rodneyraanan) June 30, 2015 [20]
... during better days. One wonders how much of these much prized material possessions Lynn will have to liquidate (in a stalking horse sale or otherwise) to satisfy the SEC's monetary damages which, once all settled, will be sure to dethrone the Diva from the three commas club (and maybe even two).
