(CN) – A group of funds managed by Patriarch Partners cannot assert a RICO claim against the investment firm for allegedly falsifying reports on the health of collateralized loans in order to funnel money to itself.
U.S. District Judge William H. Pauley III dismissed a $1 billion RICO suit against Patriarch Partners, the investment group run by financier Lynn Tilton.
Patriarch’s victory comes three months after Tilton beat Securities and Exchange Commission charges alleging that she and her firm cheated investors out of $200 million by overvaluing loans in order to charger her clients higher management fees.
Similarly, Zohar, which invests in collateralized loan obligations, claimed that Patriarch managed its funds’ $2.5 billion in assets, but exploited its managerial role to funnel money to itself and collect exorbitant fees, ultimately leaving the funds unable to repay investors.
But Judge Pauley said Zohar’s allegations do not form the basis of a RICO claim, because the Private Securities Litigation Reform Act (which includes a section commonly known as the RICO Amendment) bars any RICO action predicated on the purchase or sale of securities.
“A plaintiff may not circumvent the RICO Amendment’s reach on the basis that the alleged conduct – like aiding and abetting another party’s securities fraud – is not formally recognized by the securities laws,” Pauley said.
Zohar’s claim that Patriarch manipulated the results of monthly collateralization reports are only tangentially related to the sale of securities.
But “the allegations relating to defendants’ theft of Zohar’s equity interests and distributions are fatal to the RICO claim,” the 32-page opinion concludes.