Anonymity provided protection, not by allowing us to type words we otherwise would not have typed, but by affording us with a voice without the weights and burdens of multiple degrees and professional demands and what could appear to be attorney advertising were it to have a face. Our voice spoke words of a faceless anybody who did the research and came to a set of conclusions. We no longer have that level of protection. So we tread lightly, a chilling of speech in full force and effect. And for the sake of attorney ethics, perhaps call this attorney advertising, perhaps not. View it as you will.
And we digress. The ruling below by Judge Brian Cogan feels nothing short of a betrayal of justice for the victims, for justice and for the entire financial system. The jury had it right despite the theatrics of truly gifted attorneys representing the defendants. The attorneys did their jobs and the jury ruled, even at the many legal and judicial disadvantages imposed by Judge Cogan. And then the judge overruled.
We don’t get it. It feels very wrong.
The jury was an unsophisticated jury with likely precious little by way of experience in the investment world. And yet they were convinced that there was enough evidence to convict Mark Nordlicht and David Levy. We were disappointed they missed the whole picture but they got a piece of it right.
Unfortunately the Prosecution team did a rather inadequate job of breaking up the entire fraud piece by precious piece; and missed so many crucial bits of evidence to put before the jury, not the least of which was a comparison to how the global markets were performing at the time the Platinum Partners were active. This comparison shed light on how lacking in transparency were the activities of Platinum Partners now Teflon Partners at the time.
It was all very complicated; but could have been broken down by someone with enough experience in investments to break it all down. Yet the jury got the significance of Black Elk, a feat of epic proportions.
We have years of research behind our stories on this subject, a lifetime in the hedge fund world and extensive knowledge of the subject matter. The lawyers representing the State were out-played by master craftsmen. Simple.
But the jury got it right.
To be undone by the judge came as a surprise, accompanied by a deep sense of sadness and a feeling of despair for everything just and true about our judicial system, if such truth exists, and our financial markets. The markets work because of the integrity of the investment vehicles, the rules the hedge fund managers MUST play by. Teflon/Platinum Partners did not play by those rules. It all only works in concert when the investors can count on the judicial system to ensure act as referees or alternatively dole out equitable and judicial remedies when all else has failed. In this case, the justice system was in discord, as we see it.
The world’s financial markets continue to function only when investors can trust the underlying materials about the risks, solely when investors understand the thickness of the ice they are going to be skating on, which is supposed to be transparently laid out. There can be no substrata of lies and deceit or the entire endeavor is accompanied by hidden risks. That was the Teflon/Platinum Partners strategy. They hid risks, the ice was thinner in places.
This case, if not for any other in our anonymous and not-so-anonymous viewpoint, is representative of an entirely broken system. If risks can be so well hidden that minutiae determine a Judge’s unilateral decision to overturn a verdict, no market is safe.
The jury understood the material and afforded us with a just result. The judge here we simply do not understand.
Hopefully the prosecution team will retry this case; and perhaps they will contact those with an abundance of knowledge on the materials for assistance. If they decide not to retry the case, the victims will have been re-victimized by the very system designed to protect them.
If the Prosecution does not retry this case it will only either serve to substantiate a belief in unequal justice for the wealthy or prove that the Securities Acts and the investor laws are meaningless or some combination of the two. The Jury got it right. One of those convicted has been acquitted by Judge Cogan. Game well played.
We implore upon the Prosecution to take up the case again and to do better.
In a rare move, U.S. District Judge Brian Cogan (Eastern District of New York) overturned a jury’s conviction. Cogan acquitted David Levy and granted a new trial for Mark Nordlicht. Levy and Nordlicht, both executives at now defunct hedge fund Platinum Partners, were convicted of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud in July of this year after a 9-week trial. A third defendant, former Chief Financial Officer Joseph SanFilippo, was cleared of all charges.
Back on December 14, 2016, seven individuals were indicted for their alleged participation in transactions at Platinum Partners, which was founded in 2003. Two of the primary targets of the investigation were Nordlicht, one of Platinum’s founder partners and its Chief Investment Officer, and David Levy, a senior executive at Platinum who also served as co-portfolio manager for Black Elk, an oil and gas company that Platinum controlled from August 2010 through September 2015.
As the trial approached, Nordlicht made a change in counsel from high powered attorneys at Quinn Emanuel Urquhart & Sullivan LLP to Jose Baez who gained notoriety when he won “not-guilty’ decisions in two separate high profile murder cases defending Casey Anthony (Florida) and former New England Patriot tight end Aaron Hernandez. It was an interesting strategy and one that seems to have paid off for now.
There is no doubt that there was some great lawyering here, but the case is also interesting because it went from some slam dunk Ponzi scheme, to a real hedge, who had some exotic investments, that went out of business after the FBI raided the place. So was it the hedge fund that was a fraud or an FBI raid that caused the fund to shut down? One thing is clear, there was a raid.
Platinum managed multiple funds, including Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”), Platinum Partners Credit Opportunities Master Fund, L.P. (“PPCO”), and Platinum Partners Liquid Opportunity Master Fund L.P. (“PPLO”). One transaction involved the valuation of one of the funds’ investments, Black Elk – an oil and gas company that Platinum controlled from August 2010 through September 2015, and the subsequent sale.
Government prosecutors claimed that Nordlicht and Levy hatched a plan to get the money from Black Elk’s sale through misrepresentations to bondholders. The Government claimed that the evidence would show that the defendants rigged the Black Elk bond consent solicitation. At trial, the jury found Nordlicht and Levy guilty on counts six to eight (related to the Black Elk) but not guilty on counts one to five, which related to Platinum.
After a 9-week trial and the partial guilty verdict, Nordlicht and Levy moved for a judgment of acquittal under Federal Rule of Criminal Procedure 29 and for a new trial under Federal Rule of Criminal Procedure 33. Judge Cogan deferred ruling on these motions until Nordlicht, Levy, and the government prosecutors fully briefed their respective positions. So just when prosecutors thought the trial was over, it wasn’t. After hearing arguments from both sides, Judge Cogan acquitted Levy and stated that Nordlicht’s motion for acquittal was denied, but a new trial was approved as prosecutors did not provide enough evidence to sustain the conviction.
Judge Cogan wrote;
“In considering whether to grant a new trial, a district court may itself weigh the evidence and the credibility of witnesses, but in doing so, it must be careful not to usurp the role of the jury .. The ultimate test is whether letting a guilty verdict stand would be a manifest injustice. … There must be a real concern that an innocent person may have been convicted.”
Although the Government adduced sufficient evidence for a judgment of acquittal to be unwarranted, letting the verdict stand against Nordlicht would be a manifest injustice. Thus, Nordlicht’s motion for a new trial is granted.
It was a complex case but Platinum was a complex hedge fund, something any jury would struggle with. It all started with an FBI raid, allegations that Nordlicht was seeking to flee the country and that the hedge fund was a Ponzi scheme. It turns out that the FBI’s raid was successful in taking down the Platinum but there was no clear motivation as to the defendants when they began to experience a liquidity crisis at Platinum (a real issue but not necessarily criminal). It’s not against the law to make bad decisions or to lose money … something that seems to have been criminalized in this case.
The Personal Assets of Platinum’s Partners and Their Wives – Who Owns What? It is Well Hidden, The Trust Confusion
EDITED 9.23.19 3:49PM
We have posted a tax grievance filed by the wife of Mark Nordlicht, Dahlia Kalter. In the interest of privacy, we have redacted both the property address and the telephone numbers, though they are accessible publicly.
To provide some background, Mark Nordlicht along with one of the partners was convicted in the Black Elk scheme and has unsurprisingly appealed that conviction. But, perhaps the Judge who has yet to rule on the appeals, might want to consider what has happened to assets and the concerted efforts (often apparently confusing) to keep those assets hidden.
The holding companies/trusts/family investments vehicles are so confused, it would seem, that those charged with managing them and defending them (against things like tax assessments) can’t keep them straight.
The paperwork speaks for itself…
The losses to Black Elk Investors, well… those should somehow be recoverable. Perhaps one of the many trusts the money could have seeped into?
Mark Nordlicht, the founder of defunct hedge fund firm Platinum Partners, was found guilty on Tuesday of defrauding bondholders of an oil exploration company Platinum controlled, but cleared of charges he defrauded investors in Platinum’s hedge funds….
The three men were accused of lying to investors about the health and liquidity of the flagship Platinum Partners Value Arbitrage fund. Prosecutors said Platinum operated “like a Ponzi scheme” by using new money to fund redemptions by earlier investors, a practice referred to internally as “Hail Mary time.”
The jury, however, rejected those charges, finding all three men not guilty.
This is a truly shocking outcome, given the alleged bribe and all of that missing money and all of the things the Platinum execs did to avoid facing the music, from the aforementioned alleged witness intimidation to the alleged plan to spend the rest of their days safe from extradition in Israel, and also how relatively easy it is to win convictions on these sorts of things. And it could get yet more shocking still.
After the jury left, lawyers for Nordlicht and Levy moved to overturn the guilty verdicts. U.S. District Judge Brian Cogan ordered them to file papers in support of their motions and said he might hold a hearing to consider them.
Platinum is a valuable precious metal, but it’s actually difficult to distinguish it from other materials, such as white gold and silver, by simply looking at them. However, platinum is harder to dent, not as soft as gold or silver, and weighs more than each of them. There is no bargain for platinum, either. With common sense and little knowledge, you can avoid buying fool’s platinum.
Platinum Partners is a New York-based hedge fund manager with more than a billion dollar assets under management — only a few people have heard of them and even fewer people enjoyed their stellar returns. Over the last 13 years of operations, its flagship Platinum Value Arbitrage fund generated 17% annualized return without having any negative year. However, Platinum Partners’ track record was nothing but fool’s platinum.
For years, a little-known New York hedge fund called Platinum Partners stood out for its stellar double-digit investment returns. Platinum Partners Value Arbitrage Fund, Platinum Partners’ flagship fund, generated 650%, or 17% p.a., over the 13 years since inception with only three months of greater than 2% loss. In sum, there was something uncomfortably consistent about their performance. It turned out that those returns were nothing but ‘fool’s platinum’.
Mark Nordlicht (CIO) and Murray Huberfeld (President) co-founded Platinum Partners in 2001 and launched their flagship fund, Platinum Partners Value Arbitrage Fund (“PPVA”), in 2003. Their impeccable performance attracted money from investors and their assets under management stood $1.7 billion as of 2015, according to Platinum Partners’ last SEC filing. PPVA claimed a multistrategy investment approach which sought to generate consistent returns through several uncorrelated sub-strategies. According to the interview with Uri Landesmann in 2011, PPVA invested across seven strategies: Long Short Fundamental, Quantitative, Opportunistic/Macro, Energy Related Arbitrage, Asia Based Arbitrage, Event Driven and Asset Based Finance (Energy, General and Mining). In particular, the PPVA fund changed allocations among strategies dynamically over time based on the opportunity sets created by inefficiencies. The largest targeted allocation of the portfolio was Asset Based Finance, which represented 43% of PPVA’s net asset value.
Nordlicht, 48, is a second-generation commodities-options trader. He started his career as a trader in the pits of the New York Cotton Exchange. In 1991, he founded Northern Lights Trading, a proprietary options firm based in New York. From 1997 to 2001, partially overlapping his time at Northern Lights, he was a founder and the managing partner of West End Capital, a New York-based money management firm that specialized in privately negotiated structured debt financing for small and mid-cap publicly traded companies. He also served as the Chairman and Director of Optionable Inc. from 2000 to 2007. Nordlicht earned a B.A. in Philosophy from Yeshiva University.
Huberfeld, the 55-year old son of a kosher restaurant owner in Brooklyn, traded penny stocks, and had a long history of legal troubles since 1992 according to court filings. Huberfeld took more of a back-seat role in the fund — connecting friends and community acquaintances, but was not the public face of the company.
In 2003, Huberfeld, David Bodner and their other friends helped Nordlicht to start Platinum Partners with $25 mm. Two years later, Huberfeld also started his own hedge fund called Centurion, whose name was later changed to Platinum Partners Credit Opportunities Master Fund.
Platinum Partners’ success made Nordlicht himself rich. According to the Form ADV filing with SEC, 23% of Platinum Partners’ total gross asset value, or $382 mm, belonged to the firm’s principals, majority of which was Nordlicht’s. Additionally, the most recent Department of Justice complaint against Platinum alleged that Platinum’s management had reaped over “$100 mm in fees alone” between 2011 to 2016 — the period in which the bulk of Platinum’s legal troubles stem from.
Source: SEC Form ADV
In June 2016, Huberfeld was arrested on charges of conspiracy and wire fraud. Prosecutors alleged he had bribed Norman Seabrook, the portfolio manager for a pension fund of a New York City correction officers’ union, with $60,000 — delivered “in a Salvatore Ferragamo bag” — in exchange for a $20 million investment in Platinum Partners’ hedge fund. Both Huberfeld and Seabrook pleaded not guilty to the scam, but in December, federal agents arrested Nordlicht and six others on counts related to a $1 billion “ponzi-like” scheme that started with over-inflating private assets, covering losses and eventually, covering redemptions with new inflows.
In particular, Platinum relied on capital from a network of wealthy Orthodox Jewish investors — including the Gindi family, owners of the Century 21 department-store chain, and real estate moguls Ruby Schron and Abraham Fruchthandler. As such, the collapse of Platinum Partners was a shock to the wealthy Jewish community in New York and Florida, which has not completely recovered from the damages stemming from the Madoff scandal less than a decade ago.
The problems of Platinum Partners emerged as early as 2012. On November 6th of that year in an email entitled “Current Redemptions Nov 5, 2012” regarding a $27 mm redemption, Nordlicht had stated that “If we don’t exceed this in subs from dec 1 and jan 1 we are probably going to have to put black elk in side pocket. i also need to pay back [loan from an individual] and an additional 4 million oct 31 and nov 30 so we are talking 40”. Replying, President of Platinum Uri Landesman said “we could sweep the table here, so far, think jan 1st is a possible for some, if not all”. In response, Nordlicht writes “it’s just very daunting. It seems like we make some progress and then reds are relentless almost. It’s tough to get ahead in subs if u have to replace 150–200 a year”. Landesman ended the email chain expressing “Didn’t take it as complaining, it is my job. Redemptions very daunting”.
Later on April 29,2014, Nordlicht sent an email to CFO Joseph SanFilippo stating: “Start paying down reds [redemptions] as u can. Between Blake and ppbe (additional 10million), should have decent short term infusion. Hopefully some may 1 subs [subscriptions] show up as well. Have a few more outflows to discuss but this is obviously the priority.” Things seemed to reach a crisis point in June 2014 when Nordlicht wrote “It can’t go on like this or practically we will need to wind down….this is code red,” Yet investors remained in the dark about the firm’s precarious liquidity position — even as the firm claimed quarterly liquidity with 90% of capital being able to be returned “in the first 30 days”. A month later, when an investor emailed to ask about the reliability of Platinum’s reported performance figures, Landesman wrote back, “The numbers are all kosher, they have had verbal input every month.”
A June 3, 2014 email from a Platinum employee to Nordlicht and others entitled “Cash Sheet” listed cash on hand of $96,000; “Pending Inflows” totaling $20,000,000; “Pending Outflows” totaling $16.75 mm and Redemptions of $500,000 for May and $9.5 mm for June, which thus resulted in a “Projected Cash” of negative $6.14 mm. Nordlicht forwarded this message to another staff member asking him to: “Take June reds off the list,” inferring that Platinum was unable to meet its June redemptions of $9.5 mm.
Platinum Partners’ hunt for cash eventually led to Norman Seabrook. Seabrook was a Portfolio Manager for the pension fund of the Correction Officers’ Benevolent Association (“COBA”), the largest NYC corrections officers’ union. Seabrook was noted in filings to be “frustrated with working hard to invest the pension money and receiving no reward”. In late December 2013, Platinum Partners formerly arranged for a meeting between New York’s Correction Officers’ Benevolent Association (COBA) and Platinum Partners. By January 2014, Seabrook was able to convince his Annuity Fund Board to invest in Platinum Partners. The first investment was made in March 2014 when COBA made an initial $10 mm subscription. In June another $5 mm was added. In return, Seabrook ended up taking $60,000 in payment. A further $10,000 was donated to charity Seabrook was involved and was honored at.
Platinum Partners was involved with several suspicious transactions, which probably caused significant losses over the history of the firm. However, the biggest problem was the mismatch of liquidity and the lack of oversight for independent valuation of assets. While Platinum Partners promised investors that they could redeem their investments every month with 60 or 90 days’ notice and receive payment of 90% of their redemption request within 30 days thereafter, they started investing a significant amount of assets in illiquid investments — namely Asset Based Finance. As discussed previously, almost 43% of the PPVA’s portfolio was invested in this illiquid investment opportunities. The most notable illiquid investments were (1) Golden Gate Oil LLC, valued at around $170 mm, or 19% of PPVA’s total assets at the end of 2013, and (2) Black Elk Energy Offshore Operations LLC, representing 24% of PPVA’s total assets at the end of 2012. These two assets represented at least 20–30% of the portfolio between 2012 and 2014. At the end of 2014, almost 80% of fund assets at the end of 2014 was classified as “Level 3” assets. In late November 2015, Platinum Partners placed a majority of PPVA’s assets, all highly illiquid, in a “side pocket”, from which no redemptions were possible for three years.
PPVA’s Estimated Exposures to Golden Gate and Black Elk
Source: SEC v. Platinum Management (NY) LLC, et al
In addition to these two investments, Platinum Partners most likely experienced significant losses from exotic investments in so-called life insurance settlements, medical receivable financing and litigation financing. This is not completely confirmed as there is no overwhelmingly clear evidence in the public domain
Life insurance settlement: BDL Group, subsidiary of Platinum Partners was accused by SEC in 2014 for collecting personal information of terminally ill patients to benefit from investing in variable annuities. BDL raised approximately $56 mm for the scheme. It is not clear whether Platinum Partners lost money from this investment.
Medical receivable financing: Platinum Partners was reported as a victim of $287 million medical receivable financing Ponzi scheme orchestrated by Robert Feldman and Douglas Kuber in Florida. The scheme was operated from 2008 to 2010. The total amount of losses is not disclosed.
Litigation financing: Platinum Partners participated in Scott Rothstein’s $1.2 billion litigation financing Ponzi scheme through Banyon Capital, which essentially functioned as the scheme’s feeder fund. It is reported that Platinum Partners’ transactions totaled more than $400 mm. At the cost of other investors, Platinum Partners recovered some assets before the scheme collapsed, but eventually settled to pay $32 mm to the bankruptcy estate. The total amount of losses is not disclosed.
Platinum Partners increased its valuation of Golden Gate sharply while in actuality, the company’s performance was falling far below initial projections, with deeply disappointing oil production figures and heavy operating losses. On a process level, the company’s first development stage involved the drilling of seven wells, but such efforts bore heavy cost overruns and led the firm to consume the $18 million borrowed from Platinum Partners by the end of 2013. Golden Gate also faced heavy delays in obtaining needed permits — worsening problems further. Moreover, of the wells that were producing, such produced mostly water and many were shut down. The only consistently-producing well provided revenue representing less than 10% of initial projections. Resultantly, far from producing projected millions, Golden Gate netted $6 million losses in 2013.
Platinum Partners even tried to have Black Elk to purchase their stake in Golden Gate, but this potential transaction created a problem as Black Elk’s engineers who appraised Golden Gate’s oil reserves said preliminary estimates of Golden Gate’s reserve was merely 10% of Platinum’s prior valuation. In Sep 2014, Platinum Partners paid $3.2 million for the remaining 52% stake in the company and valued the entire stake in the company at $140 million. This transaction instantly generated $134 million paper profit, or a 16% return (in 2014, PPVA was up 10%).
Valuation of Golden Gate
Source: SEC v. Platinum Management (NY) LLC, et al
The relationship between Platinum Partners and Black Elk was even murkier and complicated, but Platinum Partners essentially controlled Black Elk and used it to manage its liquidity and inflated asset values. While holding substantial amount in Black Elk-related assets, Platinum Partners unlawfully extracted nearly $100 million out of Black Elk after Back Elk sold some of its core assets.
So murky was the relationship that a separate law-suit, a civil one, is also underway between third-party Black Elk bondholders and Platinum Partners. In this, creditors accuse Platinum Partners of using a “Trojan Horse” associated entity to bypass fair treatment of bondholder rules (that excuses Platinum from voting as a bondholder) to save Platinum’s preferred shares positioning and subordinate more senior, secured debt.
Formed in November 2007 as a limited liability company, Black Elk was an oil and gas company headquartered in Houston with all its producing assets located offshore in US federal, Louisiana and Texas state waters in the Gulf of Mexico. John Hoffman was Black Elk’s founder and CEO.
In 2009, Platinum invested in Black Elk across the capital structure through Series E Preferred shares, vote holding equity rights, and secured notes.
That investment initially seemed successful. In 2011, the Wall Street Journal reported that, helped in part by the ban on drilling in the Gulf of Mexico after the BP Macondo explosion and oil spill, Platinum’s Black Elk investment “was Platinum’s most successful last year, having contributed a significant portion of its high-teens return.”
From 2008 to 2011, Black Elk employed a buy-and-build strategy to develop its business.
To finance this, Black Elk issued $150 mm of senior secured notes on November 23, 2010. Simultaneously, the company entered into a Security Agreement in favor of The Bank of New York Mellon Trust Company, N.A. (“BNY”) as Trustee and Collateral Agent for the 13.75% Coupon Senior Secured Notes. Pursuant to such an agreement, the Senior Secured Noteholders were granted a first priority lien on substantially all of Black Elk’s assets.
At its peak of operations, Black Elk had approximately 457,065 gross (223,852 net) acres under lease in the Gulf of Mexico, 935 gross (444 net) wells and 58 production platforms.
PPVA was Black Elk’s principal lender and considered its position as one of its most profitable. At the end of 2012, Black Elk represented 24% of PPVA’s total assets. However, On November 16, 2012, though, an explosion occurred on an offshore Black Elk platform — killing three workers. The explosion caused huge legal headaches, which eventually led to spiraling legal costs, and suspensions of operations.
Black Elk was effectively insolvent by early 2014 — some trade creditors were paid, if at all, more than a year past their due dates.
Also by early 2014, Nordlicht and his associates dominated Black Elk’s management as its majority largest investor. The firm controlled its credit facility, controlling the majority of the Senior Secured Notes and also junior Series E preferred equity, and appointing and controlling the Black Elk Board and CFO. In early 2014, Platinum confronted the prospect of losing more than $100 mm if the company could not meet its debt schedule. In response, Platinum Partners looked towards selling of Black Elk’s assets and returning to the proceeds to itself, and not its senior noteholders.
This came about through the sale of Black Elk’s prime assets to Renaissance Offshore, LLC. Proceeds from that sale was to Platinum by redeeming its junior Series E preferred equity instead of the Senior Secured Notes, including those held by Platinum, which were in fact entitled to first call on those proceeds.
Thus, as Black Elk negotiated the sale of its prime assets to Renaissance, Platinum devised a method to seek noteholder approval to waive their rights to the sale through an amendment to the indenture. Understanding that it would be difficult to persuade truly unaffiliated and disinterested Secured Senior Note Holders to renounce their rights and that Platinum itself as an equity holder of Black Elk could not use its noteholder votes, Platinum had to find a way to rig the vote.
Taking into account Platinum’s ownership of most of the $150 mm in notes, $37 mm of said notes comprised a majority needed to waive the rights of the indenture.
As Platinum controlled Black Elk, this statement meant that the sum of all Notes held by Platinum, Platinum-affiliated entities and entities controlled by Platinum were to be subtracted from the $150 million Notes entitled to vote. Of the remainder, a majority had to consent.
Since it was blatantly obvious that truly unaffiliated and disinterested Senior Secured Note Holders would consent to writing-off their secured notes, Platinum this created a Trojan horse “friendly” consenter: secure the votes of a company or companies holding a substantial number of Notes that looked independent, but were in fact controlled by Platinum.
The ‘Trojan Horse’ was a group of Beechwood entities named in filings as B Asset Manager Fund and B Asset Manager Fund II. In addition to 68.9% ownership, Platinum assigned a number of Platinum employees to Beechwood, and installled a Platinum executive, David Levy, as the Chief Investment Officer of B Asset Manager. Levy still continued to use his Platinum Partners email address while “CIO” of Beachwood. Levy soon thereafter directed the Beechwood entities in early 2014 to purchase $37 mm of the Black Elk Senior Secured Notes. The Beachwood entities thus then voted to consent their Notes in favor of the Platinum proposal.
Only a few weeks after Beechwood’s vote, Levy left his position at Beechwood, and returned full time to Platinum. This manipulation of the Indenture vote secured $98 mm of the proceeds of the Renaissance sale to Platinum Partners.
Platinum’s approach was not entirely opaque. Black Elk Chief Executive Officer John Hoffman emailed Black Elk’s General Counsel and one of its retained counsel on June 26, 2014 that described his take on what was unfolding:
I apologize for this note out of the blue but I need your guidance. Platinum (PPVA) is planning to create many new companies and place the acquisitions [including Northstar] that Black Elk recently technically worked up, bid and won into those new entities. Many if not all of existing equity holders would be left in the cold with no equity in the new companies. Further, they plan to isolate Black Elk, pay themselves back ([Series E] preferred equity) ahead of so called friendly bond holders [the Beechwood entities] and lay off most people. I believe that the ultimate plan is to bankrupt the company.
John Hoffman and the General Counsel eventually jumped ship from the company in August 2014.
Hoffman was also right about Black Elk’s eventual plan. In August 2015, Black Elks creditors had placed the company into involuntary Chapter 7 bankruptcy. The company had 20 days to respond, and it was successful in its motion to convert the case to a voluntary Chapter 11 case, according to court documents.
Later on in the year, the offshore energy driller filed for Chapter 11 bankruptcy.
At about the same time as creditors filed to put Black Elk in bankruptcy, federal prosecutors filed criminal charges against Black Elk related to a 2012 rig explosion in the Gulf of Mexico. The charges stemmed from an investigation conducted by the Bureau of Safety and Environmental Enforcement which ended with 41 citations relating to the fatal explosion. A year after the explosion, Black Elk had spent $12.4 mm trying to clear up the remains and deal with the blast’s legal aftermath.
The Black Elk senior debt in question in the Schmidt vs. Platinum October 2016 case. Source: Bloomberg
But the $98 mm transfer was not enough. Indeed, taking into account Platinum’s own bondholding position in Black Elk totaling $111 mm at face value, with $74 mm held by Platinum, and another $37 mm held through the Beachwood Entities — it is clear that even Platinum lost out from its own transfers. While perhaps the scheme with Black Elk helped shoulder losses and pass them disproportionately to bondholders, Platinum nonetheless suffered a great deal.
Platinum Partners’ external auditor, BDO, in early 2015 reported to it that “a material weakness exists in the Master Fund’s investment valuation process related to its Level 3 investments.” But, Platinum Partners did not disclose to its investors this important information. The auditor also identified a “very material” misstatement that required a large markdown of the valuation of one large, illiquid position, triggering a restatement of the fund’s year-end 2013 AUM. Platinum Partners, however, terminated that auditor. Still, the replacement auditor, CohnReznick, included in its 2014 opinion, which it did not issue until September 2015, an “emphasis-of-matter” stating that management’s estimated values for investment representing over $800 million rested on unobservable inputs, and that the amounts that might be realized in the near-term could differ materially from management’s valuations.
Platinum Partners used at least three valuation agents: Alvarez & Marsal Valuation Services, LLC, Sterling Valuation Group Inc. and DeGolyer and MacNaughton. There valuation agents were chosen by Platinum Partners and provided their valuation assessments based on the data provided by Platinum Partners. For example, they did not conduct onsite checks on the assets held by Golden Gate and Black Elk as they were not commissioned to do so.
SS&C Technologies, Inc. was a fund administrator for all three funds managed by Platinum Partners. For a portfolio of highly illiquid investments, a fund administrator’s ability to evaluate the value of the portfolio is limited since they rely on the inputs from the auditor and valuation agents.
It is difficult to conclude whether Platinum Partners started as an outright fraud from the very beginning, however, they could not keep up with their promises to investors and covered up problems with lies after lies. The scheme’s collapse was triggered by the bribery case, but Platinum Partners would eventually run out of cash.
Do Not Believe in the Unusually Stable Returns
It is almost impossible to run a hedge fund for over a decade without having a substantial draw-down. All investors should know this simple fact and avoid investing in any investment scheme showing a straight line. Platinum Partners’ investment scheme was also heavily involved with the energy-related investments and the falling oil price should have had material impact on the underlying investments even though they were structured as a secured lending. Instead, the fund only had superficial down periods lasting no more than two months. Indeed, out of 155 months of operation, only three months endured a loss of more than 2%,
Source: The Corporate Prof., Bloomberg
Be aware of risks involved with hard-to-value assets
Secured lending and private equity investments can deliver “stable” returns if operated properly, but the return stream is stable only on the surface. The lack of a market price makes it very difficult for an auditor and an administrator to assess valuation of a portfolio. Investors are exposed to this unobservable risk.
Law360 (July 10, 2019, 10:25 PM EDT) — Brooklyn federal prosecutors failed to convict top Platinum Partners executives on what they once described as “one of the largest and most brazen investment frauds perpetrated on the investing public,” and the charges they convicted on are now in the hands of a skeptical judge — a far cry from the case’s headline-grabbing origins.
Two and a half years after they were indicted, Platinum Partners co-founder Mark Nordlicht and former co-chief investment officer David Levy were convicted Tuesday of defrauding bondholders in portfolio company Black Elk Offshore Operations LLC. But the jury acquitted entirely on the crux of the case: that Nordlicht, Levy and others had run Platinum’s key fund like a Ponzi scheme.
Former Platinum CFO Joseph SanFilippo was also accused of the scheme to defraud investors, and he was found not guilty. In all, the jury acquitted on 15 counts and convicted on six.
Una Dean of Fried Frank Harris Shriver & Jacobson LLP said that while the case took a number of twists and turns, the acquittal on the investment fraud scheme is not a total surprise given U.S. District Judge Brian Cogan’s skepticism of the evidence.
“It’s not common, and it definitely signals something about the nature or sufficiency of the evidence in the case — as perceived by the court at least,” Dean said of the judge’s rulings.
Nordlicht, Levy, SanFilippo and two others were charged with committing a complex fraud on investors in the Platinum Partners Value Arbitrage Fund between 2012 and 2016, as a number of those investors sought to pull funds out of the PPVA. The fund was stocked with oil and gas assets that were still in the exploration stage, making them difficult to sell.
To continue reading the Law360 article by Subscription only click here.
Platinum Partners co-founder Mark Nordlicht was convicted of defrauding investors in what prosecutors likened to a Ponzi scheme and once called one of the biggest investment frauds ever.
The verdict was returned Tuesday by a federal jury in Brooklyn, New York.
When Platinum’s flagship hedge fund was on the brink of collapse, Nordlicht and other executives concealed the truth from investors to stave off withdrawals and bring in fresh capital, prosecutors said. The government, which initially called it a $1 billion investment fraud, ultimately argued to jurors that Nordlicht and his co-defendants cheated investors out of millions, after the trial judge narrowed the scope of their case.
For more than a decade, Platinum Partners boasted some of the headiest numbers in the hedge fund industry, including 17% average gains through 2015 for the flagship fund, Platinum Partners Value Arbitrage. The U.S. said the fraud also involved two other funds Nordlicht operated.
Nordlicht, former co-chief investment officer David Levy, and Joseph SanFilippo, who was chief financial officer of the Value Arbitrage fund, were accused of using loans and money from new investors to pay off old ones, as Ponzi schemes do, prosecutors claimed.
In a second scheme, the U.S. charged that in 2016, Nordlicht and his alleged co-conspirators inflated the value and liquidity of unprofitable oil projects to exalt a fund that “held no more value than a tarnished piece of cheap metal.” Prosecutors called it “one of the largest and most brazen investment frauds perpetrated on the investing public.” The U.S. alleged that Nordlicht and Levy diverted the proceeds of asset sales tied to Black Elk Energy, one of the largest companies in Platinum’s portfolio.
Nordlicht was convicted of three counts tied to the Black Elk scheme: one of securities fraud, one of conspiracy to commit securities fraud, and one of wire fraud conspiracy. He was cleared of the Platinum fraud charges.
Levy was convicted of the same charges. SanFilippo was acquitted of all charges.
At the trial, which began April 23, prosecutors called as witnesses several former Platinum employees who had agreed to testify about their role in the alleged fraud. Among them was Andrew Kaplan, the former chief marketing officer, who pleaded guilty and secretly recorded telephone calls and meetings with Nordlicht and others, which were played for the jury.
Even as a liquidity crisis gripped the fund in January 2015, Assistant U.S. Attorney Alicyn Cooley argued, Nordlicht and his team exaggerated its prospects to get a fresh infusion of cash, promising the fund’s value would be up 8% by April of that year.
“They announced this made-up number when the fund was about to go under,” Cooley said. “The concept is, if you tell a lie because you hope things will work out, it doesn’t change the fact that you told a lie.”
Nordlicht’s lawyer, Jose Baez, told the jurors in his closing argument that the case was a “disgrace” and that it was the prosecutors who were lying — to them. Baez said there was no evidence Nordlicht intended to commit fraud and instead had a “good faith” belief that he could resolve the fund’s woes.
The verdict was handed up by a jury in federal court in Brooklyn following a nine-week trial. Platinum’s former co-chief investment officer, David Levy, was convicted of the same conspiracy and securities fraud charges.
A third defendant, former Chief Financial Officer Joseph SanFilippo, was cleared of all charges against him.
Prosecutors charged Nordlicht, Levy and SanFilippo with fraud in December 2016, saying they and others at Platinum bilked investors out of “millions and millions of dollars” in two different schemes.
In one scheme, the three men were accused of lying to investors about the health and liquidity of its flagship fund, Platinum Partners Value Arbitrage. Prosecutors said Platinum operated “like a Ponzi scheme” by using new money to fund redemptions by earlier investors, a practice referred to internally as “Hail Mary time.”
The jury, however, rejected those charges, finding all three men not guilty.
In the second scheme, according to prosecutors, Nordlicht and Levy defrauded bondholders in Black Elk, an oil exploration company Platinum owned, by diverting money from asset sales to Platinum ahead of Black Elk’s 2015 bankruptcy. The jury found them guilty of two counts of conspiracy and one count of securities fraud related to that scheme.
SanFilippo was not charged with taking part in the Black Elk scheme.
Lawyers for Nordlicht and Levy were not immediately available for comment.
Kevin O’Brien, one of SanFilippo’s lawyers, said in an email: “Joe is thrilled by the jury’s verdict of acquittal, which affirms what we have consistently maintained, that this case never should have been brought.”
Platinum’s assets are being liquidated under the oversight of court-appointed receivers.