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Hope for New York investor’s case after federal ruling?

| Jan 9, 2017 | Contract Disputes |

A billionaire investor from New York, Lynn Tilton, recently found a good reason to be hopeful in her ongoing litigation with the Securities and Exchange Commission (SEC) after a federal appeals court ruled in an unrelated case. The federal ruling indicated that the SEC has no authority to submit its cases against businesses to an administrative law judge as opposed to a federal court. Ms. Tilton own case recently went before and administrative law judge.

Ms. Tilton’s legal team has consistently maintained that she should not have to defend fraud allegations brought by the SEC before an administrative law judge. For its part, the SEC has accused her of defrauding investors by intentionally overvaluing some risky loans that she took on in her portfolio as part of her venture capital enterprise, a move that the SEC says earned her $200 million in fees but left investors holding the short end of the stick.

Ms. Tilton has described the SEC’s allegations as amounting to nothing more than a contract dispute, arguing that she had been transparent about her management and classification of these loans such that investors knew, or should have known, what exactly was going on in the process. She also argued the whole point of her fee was that she was to use her sound investment judgment in managing the portfolio of loans but obviously guarantee her judgment would yield investors a profit.

The upshot to Ms. Tilton’s argument is that, as a contract dispute, the SEC has no authority to seek return of the $200 million fees; private parties would need to sue for that money directly if they feel aggrieved.

As this case illustrates, it is not uncommon for government agencies to get involved in business disputes, sometimes even initiating enforcement actions or other litigation. This contingency needs to be accounted for by New York business who may be involved in disputes.

Source: New York Post, “Federal appeals court sides with Lynn Tilton in SEC trial rules,” Carleton English, Dec. 28, 2016.

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