WHEN: Today, Wednesday, April 1st
WHERE: CNBC's "Power Lunch"
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Patriarch Partners CEO Lynn Tilton on CNBC's "Power Lunch" (M-F, 1PM-3PM ET) today. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000367860 and http://video.cnbc.com/gallery/?video=3000367866.
All references must be sourced to CNBC.
AMANDA DRURY: WELL, TWO DAYS AFTER BEING ACCUSED OF DEFRAUDING INVESTORS BY THE SEC, FINANCIER LYNN TILTON AND HER FIRM PATRIARCH PARTNERS ARE SUING THE SEC. TILTON CLAIMS THE SEC'S ADMINISTRATIVE PROCEEDINGS VIOLATES THE CONSTITUTION. NOBODY HAS EVER WON A CASE LIKE THIS, THOUGH, AGAINST THE SEC. WELL LYNN TILTON IS CEO OF PATRIARCH PARTNERS, SHE'S HERE ON "POWER LUNCH" FOR AN EXCLUSIVE INTERVIEW. LYNN, THANK YOU SO MUCH FOR JOINING US, AND WE WILL GET TO TODAY'S NEWS AND THE SUIT CONCERNING THE SEC IN JUST A MOMENT'S TIME. BUT FIRST OF ALL, THE HEART OF THIS CASE. DID YOU VALUE THE ASSETS AND THE FUNDS IN THE SAME WAY AS DESCRIBED TO INVESTORS?
LYNN TILTON: FIRST OF ALL, THE VALUATIONS, AS THE SEC MISCHARACTERIZES THEM, ARE NOT MARKET VALUATIONS AS MOST PEOPLE WOULD KNOW IT. THEY ARE INDENTURED CALCULATIONS. THEY ARE CARRYING VALUES, THEY ARE HOLDING VALUES. AND WE HAVE VALUED THOSE CARRYING VALUES AS WERE DISCLOSED TO INVESTORS. IT'S A DANGEROUS POPULATION. THIS IS NOT MARKET VALUATIONS. THEY ARE DEFINED BY THE INDENTURES AS HOLDING VALUES OR CARRYING VALUES, AND WE WERE CONSISTENT OVER THE COURSE OF OVER A DECADE IN THE EXACT SAME MANNER AS WE ARE TODAY.
DRURY: BUT YOU DIRECTED THAT THE VALUATIONS NOT BE DONE IN ACCORDANCE WITH THE OFFICIAL VALUATION METHODOLOGY AS SET OUT IN THE DOCUMENTS FOR THE FUNDS?
TILTON: NO, THAT'S INCORRECT. WHAT I HAVE SAID IS WE HAVE VALUED THE CARRYING AND HOLDING VALUES EXACTLY AS ARE SET OUT IN THE FUNDS, WHICH IS EITHER AT PAR, A RATING AGENCY RECOVERY RATE, OR AT PURCHASE PRICE. WHAT I HAVE SAID IS THAT THE SEC HAS MISCHARACTERIZED THE WORD VALUATION AND IT'S NOT A MARKET VALUATION LIKE A MARKET TO MARKET VALUATION AS ONE WOULD APPEAR TO READ FROM THE COMPLAINT.
DRURY: IS THERE ANOTHER WAY MAYBE I COULD FRAME THIS? IS THERE PERHAPS SOME BEST PRACTICES THAT YOU COULD HAVE IMPLEMENTED TO TRY AND HAVE PREVENTED THIS FROM ALL HAPPENING?
TILTON: NO. I MEAN, I'M ALL ABOUT DISCLOSURES. EVERYTHING WAS DISCLOSED TO THE INVESTORS. WHAT THE SEC IS SAYING IS THAT THE MINUTE MY DEEPLY DISTRESSED COMPANIES ACQUIRED AT A FORECLOSURE AND BANKRUPTCY MISSED AN INTEREST PAYMENT THAT I SHOULD HAVE DEFAULTED THOSE AND NOT HELD THEM AS PERFORMING. YET, WHAT WE HAVE DISCLOSED TO INVESTORS CONSISTENTLY FOR MORE THAN A DECADE IS THE STATED RATE OF INTEREST, EXACTLY HOW MUCH THEY PAY AND THAT THEY WERE HELD AS PERFORMING. SO MY MOST SOPHISTICATED INVESTORS HAD ALL THE INFORMATION THEY NEEDED MONTH AFTER MONTH, QUARTER AFTER QUARTER, TO UNDERSTAND THE CASH FLOWS IN A CASH FLOW COLLATERALIZED LOAN OBLIGATION.
DRURY: OKAY. LET'S GO TO THE NEWS OF TODAY AND THAT IS THAT YOU ARE FILING SUIT AGAINST THE SEC, ALLEGING THEIR ADMINISTRATIVE PROCEEDINGS VIOLATES THE CONSTITUTION. THERE IS NO PRECEDENT AS FAR AS I'M AWARE OF WINNING AGAINST THE SEC IN A CASE LIKE THIS. SO WHY ARE YOU CONFIDENT THAT THIS IS GOING TO BE A SUCCESS FOR YOU?
TILTON: WELL, I'M HOPEFUL IT WILL BE A SUCCESS, BUT OUR ARGUMENT'S DIFFERENT THAN ANY OF THE OTHERS THAT HAVE BEEN MADE. FIRST, YOU KNOW, WE KNOW THAT THE ADMINISTRATIVE LAW JUDGES HAVE NOT BEEN CHOSEN AS WAS MANDATED BY THE SUPREME COURT. THEY ARE SUPPOSED TO BE CHOSEN BY THE COMMISSIONERS OF THE SEC, AND THEY HAVE NOT. SO THAT VIOLATES THE CONSTITUTION. BUT ALSO, AFTER FIVE AND A HALF YEARS OF INVESTIGATION, YOU KNOW, UNLEASHED SUBPOENA POWER AND ONE-SIDED TESTIMONY NOT TO GIVE ME A CHANCE TO HAVE THE MEANS AND THE TIME TO DEFEND MYSELF SEEMS UNFAIR AND INEQUITABLE.
DRURY: I CAN CERTAINLY UNDERSTAND WHERE YOU ARE COMING FROM, BUT, NONETHELESS, DID YOUR ATTORNEYS WARN YOU THAT THERE HAS BEEN NO PRECEDENT FOR WINNING IN A CASE LIKE THIS? YOU'RE AWARE OF THE RISKS, BUT YOU STILL WANT TO GO AHEAD WITH IT?
TILTON: LOOK, ONE OF THE THINGS YOU LEARN ABOUT BEING A WARRIOR AND FIGHTING FOR TRUTH IS THAT YOU KEEP MARCHING FORWARD IN THE DARKNESS EVERY DAY UNTIL YOU SEE THE LIGHT. I'VE HAD MANY DAVID AND GOLIATH BATTLES. THIS IS NOT MY FIRST ONE, AND I HAVE NEVER HAD AN ADJUDICATION AGAINST ME BECAUSE I FIGHT FOR TRUTH AND I FOLLOW TWO THEORIES. ONE IS I FOLLOW THE LAW, AND I FOLLOW THE RULES OF INTEGRITY. THEREFORE, I CAN BE BOLD AND STRONG AND FIGHT FOR WHAT I BELIEVE IN.
DRURY: AND THAT YOU CERTAINLY DO, LYNN, BUT THINK ABOUT THE WORST CASE SCENARIO. THE SEC HAS NOT RULED OUT THAT THIS COULD BE REFERRED TO THE JUSTICE DEPARTMENT FOR CRIMINAL CHARGES. DOES THAT CONCERN YOU?
TILTON: I CERTAINLY HAVE NOT SEEN ANY REASON THAT THAT WOULD BE DONE. I MEAN, THIS IS A CONTRACT INTERPRETATION CASE AND A CASE BASED ON FINANCIAL STATEMENT TECHNICALITIES, ALL OF WHICH ARGUMENTS WERE NEVER PRESSED OVER THE COURSE OF A DECADE BY INVESTORS.
DRURY: I HAVE A LOT MORE QUESTIONS, BUT ROBERT FRANK, YOU HAVE BEEN COVERING THIS STORY FOR FIVE YEARS NOW, SO YOU KNOW A LOT ABOUT IT. WOULD YOU LIKE TO COME INTO THE CONVERSATION AS WELL?
ROBERT FRANK: YEAH, I GUESS MY MAIN QUESTION IS THE SEC'S JOB IS TO PROTECT INVESTORS, AND I WONDER WHO ARE THE INVESTORS HERE? ARE THEY TRULY SORT OF VICTIMS AS WE WOULD KNOW THEM, AND WHO DO YOU THINK THE SEC IS TAKING THIS ACTION ON BEHALF OF?
TILTON: WELL, FIRST, YOU KNOW, I THINK IT HASN'T BEEN SAID THAT I AM THE EQUITY HOLDER OF ALL THE FUNDS. I ALSO NOW OWN TWO-THIRDS OF ZOHAR ONE, WHICH IS THE FIRST FUND, THE DEBT OF ZOHAR ONE, WHICH IS THE ONE THAT MATURES IN NOVEMBER OF 2015.
FRANK: BUT CLEARLY THERE WERE SOME ANGRY INVESTORS HERE WHO COMPLAINED TO THE SEC. WHO ARE THESE INVESTORS?
TILTON: I ACTUALLY – WELL, YOU KNOW THAT I CAN'T GIVE YOU CONFIDENTIAL INFORMATION. I WILL TELL YOU THAT THEY ARE THE MOST SOPHISTICATED INVESTORS YOU KNOW. LARGE BANKS, LARGE HEDGE FUNDS, INVESTMENT BANKS. I DO NOT BELIEVE THAT THIS CAME FROM INVESTORS. THIS STARTED ALMOST SIX YEARS AGO, AND THEY HAVE LOOKED AT EVERY PART OF MY BUSINESS. THEY HAVE ALL MY EMAILS FOR THE LAST FOUR YEARS AND SOME BACK TO A DECADE. THEY'VE INVESTIGATED EVERY PART OF MINE AND PATRIARCH'S BUSINESSES, AND IN THE END, THEY BROUGHT A CASE BASED ON DISCLOSURES THAT WERE EVIDENT TO THEM ON DAY ONE.
FRANK: SO WAS IT A WHISTLE BLOWER THAT HAD SOME HOT TIP THAT YOU WERE ENGAGED IN A MUCH BIGGER SORT OF FRAUD OR THEFT SCHEME? WHAT DO YOU THINK STARTED THIS?
TILTON: I AM BAFFLED. I MEAN, LOOK, TRUE. I'M BAFFLED THAT IT TOOK SIX YEARS TO COME UP WITH A CASE THAT ON ITS FACE IS ABOUT DISCLOSURES THAT I RELEASED ALMOST 100 PAGES OF, YOU KNOW, TRUSTEE REPORTS EVERY MONTH THAT SHOWED THE ACTUAL THINGS THAT THEY ARE SAYING ARE NOT CLEAR, SO THE TRUTH IS I AM BAFFLED.
DRURY: SO WHY DO YOU THINK THEY'RE TARGETING YOU? DO YOU THINK IT'S SOME KIND OF WITCH HUNT?
TILTON: LOOK, I HOPE THAT SOMEDAY THE TRUTH COMES OUT ON WHY I'VE BEEN TARGETED. ALL I CAN TELL YOU IS I FEEL VERY STRONGLY IN OUR CASE. I THINK THAT THEY ARE WRONG AND MISTAKEN, AND I DON'T KNOW EXACTLY WHY I WAS TARGETED.
DRURY: SO YOU CAN CATEGORICALLY SAY THAT NONE OF YOUR INVESTORS RAISED A RED FLAG TO THE SEC?
TILTON: I CAN CATEGORICALLY SAY THAT NONE OF THE INVESTORS RAISED THESE ISSUES TO ME OVER THE COURSE OF A DECADE. THEY DID NOT PRESS THESE ARGUMENTS THAT THE SEC NOW MAKES OVER MORE THAN A DECADE. WE HAVE AT TIMES HAD QUESTIONS ABOUT THINGS WHICH WE'VE ANSWERED AND HAVE NEVER BEEN CHALLENGED. NOT BY THE TRUSTEE. NOT BY INVESTORS. NOT BY THE INSURER.
FRANK: NOW, YOU OWN SOMETHING LIKE 74 COMPANIES, RIGHT? THIS COMES AT A VERY SENSITIVE TIME FOR YOU. YOU WERE IN THE MIDDLE OF RESTRUCTURING THE INVESTMENTS IN ZOHAR ONE, ONE OF THESE FUNDS. WHAT HAPPENS IF THAT DOESN'T GO WELL, AND WHAT HAPPENS IF THAT'S NOT RESTRUCTURED? WILL THESE COMPANIES BE FORCED TO BE SOLD IN A FIRE SALE OR SOME FORCED SALE?
TILTON: WELL FIRST OF ALL, I HAD BEEN WORKING FOR MORE THAN THREE YEARS ON A RESTRUCTURE ON ZOHAR ONE, AND OVER A YEAR AND A HALF ON A REPURCHASE OF ALL THE NOTES AND ALL THE FUNDS, SO THIS HAS DEFINITELY COME AT A BAD TIME. THAT SAID, AS I SAID, THIS WEEK I BOUGHT TWO-THIRDS OF THE NOTES IN ZOHAR ONE. THAT WILL REALLY HELP IN TERMS OF GETTING A RESTRUCTURING DONE, AND I'M HOPEFUL THAT WILL GET DONE VERY SHORTLY. BUT IN TERMS OF WHAT HAPPENS IF THE RESTRUCTURING DOESN'T GET DONE EVEN WITH THIS, YOU KNOW, LARGE PURCHASE OF $300 MILLION OF NOTES –
FRANK: THAT WAS YOUR OWN MONEY?
TILTON: THAT WAS MY OWN MONEY.
FRANK: BECAUSE THE SEC SAYS YOU HAVE TAKEN OUT MORE THAN $200 MILLION THAT YOU WERE NOT JUSTIFIED TO TAKE OUT OF THESE FUNDS.
TILTON: AND WHAT THEY DON'T SAY IS THAT I PUT MORE THAN $350 MILLION EITHER INTO THE FUNDS OR INTO THE PORTFOLIO COMPANIES AND THAT I HAVE TENS OF MILLIONS OF DOLLARS OF FEES THAT I'VE DEFERRED SO THAT THE COMPANIES HAVE THE CASH FLOW TO BE ABLE TO PROSPER.
FRANK: SO THEY'RE ONLY LOOKING AT ONE SIDE OF THE BALANCE SHEET.
TILTON: SO THE ANSWER TO YOUR QUESTION, IF BY CHANCE EVEN AFTER THIS LARGE PURCHASE I'M UNABLE TO RESTRUCTURE, EXTEND THE MATURITY, THERE IS NO FIRE SALE OF THE COMPANIES. WHAT HAPPENS IS IN MAY, I PUT UP THE LOANS, NOT THE COMPANIES, BUT THE LOANS IN ZOHAR ONE, AND IF IN MY GOOD FAITH BUSINESS JUDGMENT THOSE LOANS ARE BID AT FAIR VALUE, THEN I WILL SELL THEM. IF NOT, THEN WE JUST MARCH ON.
DRURY: YOU ARE SELF PROFESSED SELF-MADE BILLIONAIRE. YOU KNOW, A TYPICAL RAGS TO RICHES STORY, AND WE COMMEND YOU FOR IT. DOES THIS HAVE THE POTENTIAL TO END UP AFFECTING YOUR OWN PERSONAL WEALTH?
TILTON: WELL, I MEAN, YOU KNOW, A LOT OF MY WEALTH LIES IN MY COMPANIES AND IN MY FUNDS AND, FRANKLY, YOU KNOW, THIS IS NOT A GOOD THING FOR US, BUT I PLAN ON BUILDING VALUE. I PLAN ON TAKING CARE OF MY EMPLOYEES, AND WE WILL GET THROUGH THIS. BUT MY WEALTH, YOU KNOW, NO ONE NEEDS TO WORRY ABOUT ME BEING ABLE TO LIVE THE LIFESTYLE I'VE GROWN ACCUSTOMED TO.
DRURY: JUST ONE LAST QUICK QUESTION WITH REGARDS TO YOUR CHARACTERIZATION OF THE SEC BECAUSE THE SEC HAS SAID THAT THEY THINK THAT THIS REALLY PROVES THAT THEY DO UNDERSTAND COMPLEX FINANCIAL INSTRUMENTS. DO YOU THINK THAT THEY HAVE MAYBE MISUNDERSTOOD YOUR BUSINESS?
TILTON: I THINK THEY'VE COMPLETELY MISUNDERSTOOD MY BUSINESS. THEY ARE COMPARING MY GOVERNING DOCUMENTS TO A CLO THAT WOULD BE FOR PASSIVE INVESTING AND PERFORMING LOANS. MY CLO'S ARE UNIQUE. ONE OF A KIND. THEY ARE FOR DISTRESSED LOANS AND EQUITY. THEY ARE AN ACTIVE TURNAROUND STRATEGY. NOT PASSIVE. MY INTERESTS ARE ALIGNED WITH THE FUNDS IN OWNING THE EQUITY. DEBT GETS BEFORE EQUITY. THEREFORE, MY INTENTIONS ARE ONLY TO MAXIMIZE THE VALUE OF OUR UNDERLYING OPERATING COMPANIES.
DRURY: WELL LYNN, THANK YOU VERY MUCH FOR COMING AND SPEAKING WITH US. THANK YOU, ROBERT, AS WELL, FOR JUMPING IN.
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