On Monday December 19, six top executives of New York-based hedge fund manager, Platinum Partners, were arrested and accused of a $1 billion fraud, as reported by Reuters. For years, Platinum was well known for yielding remarkably high returns. This was said to be achieved by their aggressive tactics in investing and fund management. It was a powerful marketing tool to attract new investors, and successfully produced over $100 million in fees.
A 48-page criminal indictment against Uri Landesman, President of Platinum Partners along with founder Mark Nordlicht, and five others focuses on a murky corner of the financial world where the hedge fund peddled, according to an article in Forbes. Besides Landesman and Nordlicht, the others arrested in the fraud scheme were Joseph Mann, Joseph San Filippo, and David Levy who is the firm’s co-chief investment officer. The New York Times reported that the men were charged with securities fraud and investment adviser fraud, according to an unsealed indictment filed in Federal District Court in Brooklyn. The Securities and Exchange Commission filed a parallel civil case.
The New York Times reported that it is one of the largest such fraud cases since Bernard L. Madoff’s investment firm unraveled in 2008.
The indictment says that since 2012 the defendants allegedly defrauded over 600 investors by over estimating the values of their illiquid assets, most of which consisted of troubled energy-related investments, including Black Elk Energy, a now bankrupt oil driller. This caused a "severe liquidity crisis". The $1.3 billion hedge fund allegedly took out high-interest loans to pay investors who redeemed assets at highly inflated values.
Eventually, Platinum selectively chose to pay some investors before others. As reported by Forbes, the U.S Department of Justice in the Eastern District of New York accused Platinum Partners of "operating like a Ponzi scheme” with an eight count indictment.
"The charges ... highlight the brazenness and the breadth of the defendants' lies and deceit," said Brooklyn U.S. Attorney Robert L. Capers. “Platinum Partners purported to be a standard bearer in the hedge fund industry, reporting annual average returns of more than 17 percent since inception in 2003,” continued Mr. Capers. “In reality, their returns were the result of the overvaluation of their largest assets, which eventually led to Nordlicht and his co-conspirators operating Platinum like a Ponzi scheme, where they used loans and new investor funds to pay off existing investors.”
“As investors sought redemptions, the defendants engaged in numerous improper measures in an attempt to meet redemption requests, including taking out high-interest rate loans, commingling monies among funds and raising money from new investors through fraudulent misrepresentations,” said Andrew J. Ceresney, the director of the S.E.C.’s enforcement division.
The indictment is just the latest in a series of legal imbroglios for Platinum Partners, which was founded in 2003. In June of this year, Murray Huberfeld, a part owner of Platinum was arrested and charged in a kickback scheme involving pension funds in New York State. He was charged with paying $60,000 in bribes to the president of the New York City Correction Officers Benevolent Association, Norman Seabrook in order to ensure Mr. Seabrook investing COBA’s pension and dues money from its members into his fund. At that time, Platinum announced that it will close down its main fund as a result. COBA had invested about 20% of its annuity into the fund under Norman Seabrook’s leadership, even though Platinum had a risky reputation at the time.
The Federal Bureau of Investigation had raided the offices of Platinum Partners in June in order to more fully inspect their hard-to-value liquid assets. Platinum Partners has had to continually ensure its members and investors that their assets are solid and nobody’s money is at risk. They’ve pointed out, for example, that there was only one “down month” nine years ago for them. The new president of the Correction Officers Benevolent Association, Elias Husamudeen has had to send out a letter promising the members and employees that their money is “safe.”
Murray Huberfeld has a complicated past. He had made large donations in the millions of dollars to charity, including Orthodox Jewish causes, through the Huberfeld Family Foundation. These have included shuls that are part of the Chabad Lubavitch movement. He has also been a member of the Simon Wiesenthal Center. While, at the same time, he was convicted of a misdemeanor in 1992 for having someone else take his Series-7 broker-licensing exam for him. For that he paid a $5,000 fine and was sentenced to two years’ probation. In 1998, Mr. Huberfeld and his partner David Bodner, handed over almost $5 million in profits and interest in order to settle allegations in court that they sold 513,000 shares of secret stock. An additional $50,000 civil penalty had to be paid to the Securities and Exchange Commission.
In October of this year, Platinum Partners filed for Chapter 15, a section of the U.S. Code involved with international insolvency. At issue is the fund’s legal operations in the Cayman Islands
It turns out that Platinum Partners has “severe and substantial liquidity problems” according to two Cayman Island liquidators who are investigating the hedge funds assets in the Caymans. Also cited as issues are the frequent investigations by the U.S. Securities and Exchange Commission and Justice Department, as well as unpaid bills mounting into the hundreds of millions.
Despite Platinum’s heavy play in the media, the fund appears to have mostly trafficked in obscure public and private investments.
Platinum’s March 2016 form ADV filing with the SEC shows $1.7 billion in assets under management, split between $1.1 billion in its signature fund Platinum Partners Value Arbitrage fund and $590 million in its Platinum Partners Credit Opportunities fund.
After Huberfeld’s arrest a few months ago, the New York Times reports that some at Platinum gained a sense that government investigators were eventually going to come down strong on the entire company. The New York Times reports that in an email exchange, Nordlicht, Landesman and an unnamed principal partner in Platinum discussed the possibility of fleeing to Israel, according to prosecutors.
“Don’t forget the books,” the unnamed partner wrote. “Assume we are not coming back to ny.”
By: Jason Neiberger