For his son’s bar mitzvah in 2008, hedge-fund manager Murray Huberfeld chartered a JetBlue
plane and invited hundreds to an oceanfront party in Palm Beach, Fla. An Orthodox pop star known as the “Jewish Elvis” entertained the guests, who Mr. Huberfeld says included investors in his fund.
Intimate ties and fundraising inside a close-knit world of observant Jewish businesspeople in New York, Florida and Israel are central to the $1.25 billion hedge-fund firm Mr. Huberfeld has helped lead, Platinum Partners. Now those ties are being tested as two sets of federal prosecutors as well as securities regulators delve into Platinum’s operations.
In early June, Mr. Huberfeld was arrested in connection with an alleged scheme to bribe a union leader to funnel $20 million to Platinum. Later in June, federal agents raided Platinum’s New York offices.
An issue for investigators now, according to those familiar with their probe, isn’t just alleged bribery but the integrity of Platinum itself: It is also a fraud investigation.
Platinum has recorded some of the most impressive numbers in the hedge-fund world, double-digit average annual returns for over a decade.
Beginning around 2012, however, with some investors wanting their money back, Platinum began borrowing heavily. According to documents reviewed by The Wall Street Journal and people familiar with the firm, Platinum borrowed hundreds of millions of dollars, some of it at double-digit interest rates.
In one instance, it paid interest to a lender part-owned by family-member trusts of Mr. Huberfeld and Mark Nordlicht, Platinum’s founder and chief investment officer.
In June, Platinum suspended redemptions from its flagship fund and stopped giving performance updates. It moved to liquidate the fund and discussed plans to repay investors but didn’t commit to giving to them cash matching the full investment gains the firm has reported. Last week, Platinum said it would also liquidate the rest of the firm.
Investigators now are looking into whether, before the suspension, Platinum had been paying some reported investment gains to exiting investors with money from incoming ones, according to people familiar with the probe.
They also are scrutinizing the firm’s service providers, including auditors who certified its figures.
Platinum has invested in exotic assets that can be hard to value, such as loans to struggling companies and annuities linked to ill patients’ lives. Among questions investigators seek to answer is whether Platinum misstated values of some holdings, the people familiar with the probe said.
Platinum spokesman Montieth Illingworth defended the firm’s auditing and valuation methods and said it stands behind its performance record.
On specific investigative points, he said, “It is incorrect to imply that past payouts to investors were specifically made with new allocations.”
He also said money wasn’t borrowed to meet redemptions. “Past redemptions were paid out of cash gains from the positions we invested in,” Mr. Illingworth said.
Platinum said it expects to begin repaying investors in 2017. A person close to the firm said it hopes eventually to pay back all $1.25 billion, or more, with further investment gains.
Under investigation in addition to the firm is Mr. Nordlicht, said people familiar with the probe. The spokesman said they are cooperating with investigations. No one other than Mr. Huberfeld has been accused of wrongdoing.