By Jonathan Stempel
NEW YORK (Reuters) - Lynn Tilton, the colorful New York financier recently cleared of wrongdoing in a U.S. Securities & Exchange Commission fraud case, won another legal victory on Friday as a federal judge dismissed a racketeering lawsuit by the Zohar investment funds she once managed.
U.S. District Judge William Pauley in Manhattan said the alleged misconduct by Tilton and her firm Patriarch Partners "runs headlong" into a Congressional ban on civil racketeering claims predicated on the purchase or sale of securities.
The three Zohar funds had accused Tilton and Patriarch of "pilfering" more than $1 billion of cash and other assets through a "toxic mix of fraud, theft, and mismanagement," leaving the funds unable to meet obligations to their investors.
In his 36-page decision, Pauley said much of the alleged looting scheme appeared "at least superficially" not to involve securities.
But he said an "integral" component of that scheme "included pillaging portfolio companies of their equity, re-directing Zohar's equity interests for defendants' benefit, and diverting the equity distributions into defendants' coffers--all actions coinciding with the purchase or sale of securities."
Pauley also refused to assert jurisdiction over 11 other Zohar claims, noting that the funds had filed a similar lawsuit in Delaware Chancery Court.
Lawyers for the Zohar funds did not immediately respond to requests for comment.
A spokesman for Patriarch said the firm is "extremely pleased" with the dismissal.
"This suit -- which was filed for no other purpose than to harass and publicly defame Ms. Tilton -- had absolutely no basis in fact or law," the spokesman said in a statement.
Known for her flamboyant clothing, Tilton is a private equity veteran dubbed "The Diva of Distressed" for turning around troubled companies, and was briefly the subject of a reality TV show with that title.
Her distressed debt empire grew to $2.5 billion before fraud and mismanagement allegations began to mount.
Tilton had created the first Zohar fund in 2003, and gave up management of all three funds in March 2016.
On Sept. 27, an SEC administrative law judge said the regulator failed to prove that Tilton bilked investors out of more than $200 million of management fees by hiding the poor performance of assets underlying the Zohar funds.
In November, Tilton and Patriarch filed a countersuit against the funds and separate claims against other defendants. Pauley directed the funds to respond by Jan. 12, 2018.
The case is Zohar CDO 2003-1 Ltd et al v Patriarch Partners LLC et al, U.S. District Court, Southern District of New York, No. 17-00307.