Private equity investors generally have to make a leap of faith and trust that all the behind-the-scenes wheeling and dealing their money managers do will end up being more or less above-board. There's just no way for an investor to execute due-diligence on every single private deal a PE firm makes. Sure, there are hundreds of pages of fine-print legal documentation, but what the system really runs on is trust.

That's basically what Lynn Tilton, the self-proclaimed “Diva of Distressed Debt” and chief executive of Patriarch Partners argued in court last month: “An investment in Zohar Notes,” her lawyers said in recent trial briefs, referring to her embattled private equity funds, “was really an investment in Ms. Tilton’s judgment.”

Those investments – which were technically purchases of collateral loan obligations called Zohar I, II and III – were also a trip into a bizarro, funhouse-mirror world of deceit and self-dealing, a new lawsuit alleges, claiming Tilton pillaged more than $1 billion through her labyrinthine control of companies she managed.

“Through a toxic mix of fraud, theft, and mismanagement, Ms. Tilton has plundered the Zohar Funds,” the lawsuit, brought by Zohar investors, claims. “While Ms. Tilton has made herself famously wealthy, she has left nothing but losses in her wake.” Tilton vigorously denies the charges.

The basics of the lawsuit are this: Zohar investors claim Tilton steered hundreds of millions of dollars in portfolio company equity that should have belonged to Zohar back to herself. Meanwhile, the lawsuit alleges, Tilton covered up just how troubled some of the companies she controlled were, allowing her to take in management fees that should have been waived.

How did she get away with all this? Because she was essentially the only person in the room when all these deals went down, the lawsuit says:

The roles that Ms. Tilton assumed for herself were so extensive and conflicted that the Zohar Funds would routinely enter into agreements where Ms. Tilton would be the single signatory executing on behalf of every party to the agreement.

Tilton managed the Zohar funds, which lent the portfolio companies money. She often appointed herself chief executive or director of the companies she managed. For consulting work, the companies hired Patriarch Partners Management Group, i.e., Lynn Tilton. When companies owned by Patriarch, say, sought a debt restructuring, it was Tilton signing the documents as both lender and creditor.

That gave her wiggle room to pull all sorts of antics, the lawsuit says, and not just the type of shenanigans Tilton is famous for – planting unwanted kisses on male colleagues, for example, or demanding her employees do body shots off her. Instead, she stands accused of basically seizing equity from portfolio companies rather than using it to pay off Zohar investors, as Zohar's terms required. No one involved in the deals was in a position to protest, since Tilton was basically the alpha and omega in the agreements.

The absurdity mounted to the point that Tilton once accused Zohar of “attempting to steal is own equity,” the lawsuit says, when the funds asked for their rightful stake in portfolio companies back.

All this just appears to be trickling out now because apparently Tilton dragged her feet providing documents to Zohar's new manager, Alvarez & Marsal, the lawsuit says. Only through a series of lawsuits have Zohar's investors been able to finally grasp what has happened to their money over the past decade or so. It's not a pretty sight.