Top executives of New York-based hedge fund manager Platinum Partners were arrested on Monday and charged with running an approximately $1 billion fraud that federal prosecutors said became "like a Ponzi scheme" as its largest investments lost much of their value.
Mark Nordlicht, Platinum's founding partner and chief investment officer, was arrested at his New Rochelle, New York, as federal prosecutors in Brooklyn accused him and six others of participating in a pair of schemes to defraud investors.
"The charges relating to these two schemes highlight the brazenness and the breadth of the defendants' lies and deceit," Brooklyn U.S. Attorney Robert Capers told reporters.
Led by Nordlicht, Platinum, the subject of a Reuters Special Report in April, was known for years for producing exceptionally high returns by taking an usually aggressive approach to investing and fund management. (reut.rs/2h36duU) (reut.rs/1TRovwx)
But a 48-page indictment said since 2012, Nordlicht and four other defendants defrauded investors by overvaluing illiquid assets held by its flagship Platinum Partners Value Arbitrage Fund LP, mostly troubled energy-related investments.
This caused a "severe liquidity crisis" that Platinum at first tried to remedy through high-interest loans between its funds before selectively paying some investors ahead of others, the indictment said.
"So to some extent, there is a Ponzi-esque aspect to this scheme," Capers said.
Prosecutors said David Levy, Platinum's co-chief investment officer, and Uri Landesman, the former president of the firm's signature fund, also participated in the scheme, which prosecutors said allowed Platinum to extract more than $100 million in fees.
Nordlicht, Levy and Jeffrey Shulse, former chief executive officer of Platinum's majority-owned Black Elk Energy Offshore Operations LLC [BLCELB.UL], also schemed to defraud bondholders of Black Elk, a now-defunct Texas energy company, out of $50 million, prosecutors said.
The indictment said the scheme involved using a group of reinsurance companies called Beechwood, partially controlled by Platinum's principals, to rig a bond vote and pay the hedge fund manager ahead of creditors.
A Platinum spokesman declined to comment. Nordlicht's lawyer did not immediately respond to requests for comment. Michael Sommer, Levy's lawyer, said he looked forward to clearing his client.
Lawyers for the other defendants did not immediately respond to requests for comment.
Founded in 2003, Platinum until this year had more than $1.7 billion under management, with more than 600 investors, authorities said. Its Value Arbitrage fund reported average returns of more than 17 percent from its inception, according to prosecutors.
This year, a series of investigations tied to Platinum came to a head. The firm hired an independent monitor in July to unwind its funds, and a Cayman Islands court in August placed its main offshore funds into liquidation.
Those moves came after the June arrest of Murray Huberfeld, a longtime Platinum associate, on charges in Manhattan federal court that he orchestrated a bribe to the head of the New York City prison guards' union, Norman Seabrook, to secure a $20 million investment with the firm.
Seabrook pleaded not guilty, as did Huberfeld who was also arrested.
Two weeks later, the FBI and U.S. Postal Inspection Service raided Platinum's Manhattan offices in a separate fraud investigation that culminated in Monday's indictment.
Others indicted on Monday include Joseph Sanfilippo, Value Arbitrage's former chief financial officer; Joseph Mann, a former Platinum marketing employee; and Daniel Small, a Platinum managing director.
The U.S. Securities and Exchange Commission said on Monday that it was seeking a court-appointed receiver for funds managed by Platinum Credit Management, the firm's second-largest vehicle after Value Arbitrage.
The case is U.S. v. Nordlicht et al, U.S. District Court, Eastern District of New York, No. 16-cr-640.
