(Adds further details on ruling, background on case)
Sept 27 (Reuters) - The U.S. Securities and Exchange Commission suffered a defeat on Wednesday, as a judge said it failed to prove private equity fund manager Lynn Tilton defrauded investors by hiding the poor performance of assets underlying three debt funds.
SEC Administrative Law Judge Carol Fox Foelak dismissed the charges against Tilton, the founder of New York-based Patriarch Partners who is known as the "Diva of Distressed" for taking over troubled companies.
The SEC's enforcement division had accused Tilton of defrauding investors in the three so-called Zohar collateralized loan obligation funds, which had raised $2.5 billion to make loans to distressed companies.
At trial, the SEC had alleged Tilton misled investors by directing the valuations of assets underlying the Zohar funds remain unchanged despite their poor performance in order to avoid the loss of $200 million in managements fees.
But Foelak ruled that while Tilton and Patriach did not make it easy for her sophisticated investors to find information, "they also did not conceal -- omit to state -- material information."
Foelak said that as a result, the SEC had failed to prove its case, which she dismissed.
Randy Mastro, a lawyer for Tilton, in an interview said his client had been vindicated.
"We have said all along that Lynn Tilton was innocent of these charges that she was falsely accused and that we would prove it at trial," he said. "Now we've done just that."
An SEC spokeswoman declined to comment. (Reporting by Nate Raymond in Boston; Editing by Clive McKeef)