Black Elk and the Bond Proceeds – Another Platinum Bait-and-Switch

Law360, New York (May 30, 2019, 9:59 PM EDT) — Jurors in the securities fraud trial of former top Platinum Partners executives on Thursday heard of how co-founder Mark Nordlicht floated plans to wield control over bonds of the hedge fund’s portfolio company Black Elk Offshore Operations LLC using Platinum affiliates, which prosecutors say was part of a scheme to defraud the oil and gas driller’s bondholders.

Prosecutors say Nordlicht, former Platinum co-chief investment officer David Levy and others used their secret sway over the majority of $150 million in Black Elk bonds to funnel the bulk of proceeds from a sale of the company’s assets back to Platinum, ahead of bondholders who had priority to the funds.

During the testimony of Black Elk’s former outside counsel at BakerHostetler, W. Robert Shearer, the jury heard of how a group of independent bondholders in late 2013 were threatening to push the bonds into default after Black Elk violated the indenture’s terms by exceeding its limits on capital expenditures.

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Platinum Partners – Nordlicht, Levy and SanFilippo and A Crime So Complicated No One Understands it

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If Mark Nordlicht, David Levy and Joseph SanFilippo are Acquitted, it will not be Because no Fraud was Committed but Because the Whole Story was Too Confusing, Even for Defense Attorney Baez

Jose Baez is representing Mark Nordlicht in Nordlicht’s fraud trial. Baez is a remarkable and seasoned attorney. He knows the law. He knows his jury. He tests the boundaries of his questions with a bright smile; and he knows how to defend his client with the sheer will of his conviction.  As defense counsel, Baez draws blood from stones. He pulls rabbits from hats. He colors the wings of butterflies while in mid flight; and he sets a scene creating doubt like a Picasso with a paintbrush shading his canvas.

So long as there is doubt, there cannot be a conviction. And the intricacies of the Platinum Ponzi Scheme were so savvy, we would be surprised if there were even a modicum of steadfast clarity for the jurors. We can only hope the government has some more tricks up its sleeves.

Unlike a murder trial where there are black and white lines drawn with very few grey areas, fraud is grey and murky. The waters one needs to navigate to convict a fraudster require a periscope that can see through a curved mirror and a jury that can see through the clouds.

Baez and the counsel for co-Defendants Levy and SanFilippo picked their jury well, not a jury of Platinum’s partners’ peers, but a jury of African Americans and young adults. There may not be a Jew among them. It is hard to tell. 

And the subject matter of the Platinum case, along with the Jewish identity associated with Platinum’s main partners and its investors is ripe for confusion, so much so that today even Baez seemed to falter.

Baez began his cross examination of the witness, Daniel Mandelbaum a former CFO for Platinum, by asking whether he was Hasidic. Mandlebaum responded with an unequivocal, “No”. Baez then attempted to somehow change Mandelbaum’s response by associating Hasidic with a wife covering her hair and a man wearing a kippa. Mandelbaum was almost offended.  A jury, like Baez, would not understand the distinction between Mandelbaum’s Orthodoxy and Hasidim. But the word “Hasidic” carries its own subliminal messages. 

Baez was playing on anti-Semitisim and associations and as such setting the stage for a cultural and religious sort of confusion.

The Platinum Partners’ partners are largely modern Orthodox. Many of them live in the same neighborhood. They share the same simchas (joyous events), attend synagogue together, break bread together raise their children together, gossip with the same people, sit shiva when someone dies and keep up with one another’s increases in wealth. There are very few secrets within this community, something the jury, like Baez will not understand.

And, the investors like the partners were community members, a part of the larger Jewish Zeitgeist, only too eager to hand over their money to Nordlicht whom they trusted. That trust defined the nature of the investment and by implication, the seriousness of the crimes. They were defrauded, and sadly blinded by their own sense of community. 

The investors were wooed by Mark Nordlicht and Murray Huberfeld, David Bodner and David Levy so much so that they did not see the signs, the patterns, the inconsistencies, the numbers and returns that made no sense. They were victims, Jewish or otherwise. Mark Nordlicht knew his craft and his audience; and he dictated and controlled the documents and hence the grift. For Baez, the documents protected Platinum and Nordlicht because they were a measure of “disclosure” a waiver of sorts. For us, they were confusing and confused. They represent an admission of guilt and by deviating from market standard, the fraud committed was all the more criminal.

The overly complicated investment documents, nuanced to give Nordlicht control over every aspect of the investment, including discretionary redemptions,  a/k/a proprietary redemptions were part of Mandelbaum’s discomfit. As a matter of general business course, when redemptions are to be distributed, they are done pari passu with other members of the class of investors requesting redemptions.

By their very nature, redemptions should not be discretionary, not even for a Holocaust survivor. One of the redemptions Nordlicht did satisfy was to a Holocaust survivor. This was not done out of the goodness of Nordlicht’s heart but out of a knowledge that he should not have taken the man’s money in the first place. That’s a story for another day. The goodness of an investment manager’s heart, or lack thereof, is not something that should play into a privately held investment vehicle.  Suffice it to say, proprietary redemptions of the sort advertised in the Platinum Partners’ private placement documents were inherently fraudulent insofar as they provided preferential and discretionary treatment. As such, investors of the same class were not pari passu with others of the same class. That is, by its very nature, a fraud. 

As Baez rightfully pointed out many times, Nordlicht had discretion. NORDLICHT HAD DISCRETION. But he also had the ability to move money from one fund to another virtually unhindered. It was all a shell game.

Mandelbaum was, during his shortlived employment with Platinum, savvy enough to see the problems, Mark Nordlicht controlled everything. There were too few checks and balances.

Baez emphasized that point by sharing screens and screens of Platinum’s various documents. But in his cross examination he stumbled over the mere suggestion that the level of discretion provided to Nordlicht was anything but acceptable. The purpose of disclosures and documents in the securities world is in short “fairness.” Investments, win or lose, high risk or low risk, are supposed to be, at the very least, fair. A jury will never understand that and Baez, as a defense counsel doesn’t have to.  

Baez asked Daniel Mandelbaum about a loan from one Platinum Partners fund to another, demanding to know whether Mandelbaum had the right, during his tenure, to question the propriety of that loan. Sixteen percent (16%) in 2015 was too high. Mandelbaum responded that generally the lender gets to decide the interest rate. The Lender was Platinum a/k/a Nordlicht. The Borrower was Platinum a/k/a Nordlicht. There was no interest rate that would have made legal sense given the financially incestuous nature of the funds and their investors. Sixteen percent was simply a shnorer-type number. Nordlicht might have wanted to choose 18% instead.

At the end of the day, Nordlicht and Platinums’ partners have likely convinced themselves and anyone who will listen that they are being wrongly accused. Why us?  The defense counsel have collectively done a splendid job keeping Murray Huberfeld’s name from being mentioned at Nordlicht’s trial. When Huberfeld is mentioned, the defense insures that his 30 month conviction for bribery is not disclosed to the jury. While Federal rules of evidence may preclude this information from being conveyed to the jury, the fact remains, it was this bribe that tipped the FEDS off to the nefarious and criminal behavior of Platinum Partners’ partners. Keeping the jury in the dark will not change this fact. 

In the event that Nordlict and his fellow Defendants are acquitted, which is not unlikely due to the complexity of the case and the ignorance of the jury, it will not be the last time that the house wins. The house always wins! 

Ultimately, the very fact that Nordlicht had the discretion in all things Platinum, a point drafted into Platinum’s funds’ documents, and emphasized repeatedly by Baez, should tell the whole story. But by and by, the jury gets to decide. We fear that Baez painted a very confusing picture by his own lack of understanding of the documents themselves. It was likely quite intentional. He is a gifted attorney. And if the Defendant’s are acquitted, he will have graduated from the Sorcerer’s apprentice to the Sorcerer himself.

We give Baez credit which cannot be understated. If you are confused, you are supposed to be.  If not, it’s a shame you are not sitting in the jury box.

 

 

A Platinum Response – Fear Would Prevent Reporting, The Nordlicht Hedge

LAW360 [by subscription]

Law360, New York (May 28, 2019, 8:15 PM EDT) — A former chief financial officer for Platinum Partners on Tuesday told a New York federal jury that Platinum co-founder Mark Nordlicht told him that “mutually assured destruction” would keep aggrieved investors from ratting the hedge fund manager out to regulators, despite Platinum’s inability to make timely repayments.

Daniel Mandelbaum, who was Platinum’s CFO for about 9 1/2 months in 2014 and 2015, said he spoke to Nordlicht amid a liquidity crisis that year at Platinum’s signature fund, Platinum Partners Value Arbitrage Fund.

Mandelbaum testified that he was protesting Platinum’s practice of preferentially repaying certain investors — including insiders and those with large stakes in PPVA — ahead of other investors who had outstanding redemption requests.

Nordlicht, however, told Mandelbaum at a meeting in Nordlicht’s office that investors wouldn’t complain to the Securities and Exchange Commission, since if the regulator got involved, PPVA would be shut down and its assets sold at fire sale prices, Mandelbaum testified.

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How to Stop Scammers – from the Eyes of the Orthodox – The Yeshiva World Analysis, Interesting Read

“Sadly, immoral individuals have often applied the following 5 step method to ripping off substantial funds from members of our community for years.
  1. Give a large donation to an institution with a wealthy donor base. Do so magnanimously and genuinely try to help out that institution – showing that it is dear to your heart.
  2. Come up with a false, but effective sounding business plan or investment strategy, and casually talk about it to wealthy individuals.
  3. Name drop big company names and or people that have signed on and show false paper work that “proves” the whole scam.
  4. Take investment money from others and, at the outset, pay a hefty return on profits. Do so from other moneys that you are receiving.
  5. Give a significant donation to the cause where a well-liked Rabbinic leader stands behind the institution and develop a relationship with him. You will need to use this relationship in order to attempt to influence him or others around him into helping defend you against those people who realize that you have stolen their money.  Articles in the Jewish media can be squashed.  This will also help you gain more people in which to obtain more money from.
The above, is not a cynical view of the world.  It is, unfortunately, a scenario that has been repeated numerous times.  It is more prevalent than it should be, in this author’s view, because people are almost entirely unaware of a Torah obligation that is incumbent upon all of us.”

PREVENTING PONZI SCHEMERS

Yes, there is a Torah obligation upon all of us to prevent the proliferation of Ponzi schemers and rip-offs within our community.  It is called the obligation to be “chas al mammon yisroel” – a fulfillment of the Torah Mitzvah of “v’ahavata larayacha kamocha.”

The Gemorah in Moed Katan 27b tells us that when Jews were burying their dead in the finest clothing, Rabban Gamliel HaZakain arose and declared that enough was enough. The rising pressures, the “keeping up with the Joneses” in how to dress the deceased was causing enormous economic pressure on the living. “It must stop,” declared the rabbi, and the tachrichim, burial shrouds, we now use became the norm.

To read the entire article click, here

The Three Identities of Fraud Within the Jewish Community – Platinum and the Hebrew, English and Yiddish Lexicon

Platinum Partners’ partners’ Indictments – Back to to the Very Beginning, and the Yiddish, Hebrew and English Identities of the Actors Involved

[Edited 5/27/19 5:23pm]

Dear Reader:

As a point of clarification, to our last blog post, we have gone back to the very beginning, the original indictments in 2016 as posted by the Department of Justice. (see below).

The entire scheme is extremely complicated and significant information has been added since the initial indictment. For our purposes, we caught on because the actors involved follow the same patterns in every fraud they commit, beginning as early as NorCrown Trust.  These men, particularly Huberfeld and Nordlicht did not deviate from a recipe that had already yielded them significant success and as time went on they simply perfected. There was not reason to.

However what has not been emphasized, and until recently with our own litigation playing out in the courts we did not realize, is that there is another aspect to these crimes, the KYC (Know Your Client) or in this case, knowing your audience and more particularly what language they would be most likely to warm up to. The players in these criminal endeavors, whether Platinum or real estate, mortgage fraud, nursing home fraud, all have something in comment – a keen sense of their audience. Platinum’s partners used that sense and the language required to provide the audience with comfort  to gain credibility, to gain trust and ultimately to play out a fraud of epic proportions. While the amount of money stolen out from under the hands of investors was not money of Madoff proportions, Madoff was straightforward in his scheme. He had been a reputable businessman. He was savvy, a grown up amongst men. There was a measure of honor among his type of thievery. Madoff’s crimes were less that of a seasoned criminal mastermind; but more like someone who stepped off the reservation… because he could.

In the case of Platinum, these guys understand the differences, however minute, between dealing with someone in Yiddish, someone in Hebrew and someone in English. These were three uniquely different types of clients and needed a vastly superior approach to gain their trust. The scheme involved a deep understanding of cultural differences and a brilliant mechanism for utilizing that knowledge to their advantage; and the perpetrators are masters of disguise. 

We have been told by multiple sources that the key to fraud within the religious community is really who calls whom by what name. For Mark Nordlicht, there were those who knew him as Moshe and those who knew him as Moshe Mark and those for whom he was simply Mark. It depended upon the shifting winds and the perceptions of the audience with which he was mingling. 

In Andrew Kaplan’s testimony he outlines 200 secret recordings he took of Mark Nordlicht, which he maintains were taken for the purpose of protecting his salary and other business matters. Perhaps he knew that at some point he would need to defend himself. One can only speculate. But it is clear from the testimony and the recordings that Nordlicht had a keen sense of language and which words to use for which thoughts he wanted to convey. This is no different from secret Morse codes or other codes used by governments and individuals communicating in languages they want kept between themselves. And the beauty of Hebrew and Yiddish is that each expression can have multiple meanings; but anyone speaking or listening knows exactly and precisely what is being said and in what context. The words have biblical messages and political messages and nuanced undertones. Gaining the key to how to communicate with the investors Platinum sought and the big money it wanted was in the language – the masters of disguise.

The same holds true of Moshe Mark Feuer. It is noted that he has maintained and continues to maintain his innocence, that he was a victim. We think that is farcical in all of its iterations, whether in Hebrew, Yiddish or English; but it is not for us to decide. Moshe Mark Feuer had all of the qualities of a businessman and the savvy to use words in different languages and lexicons which would state what he understood and give an indication on how to hide his thoughts from whomever was not on the “need to know” list at any given time. 

Expressions like “b’lev shalem” comes up quite often in the Kaplan tapes with Nordlict. It means wholeheartedly. The word “mehalech” in Hebrew is another. The translation referred to the complications they would have. Nordlicht’s brilliant defense team has maintained that this was all in humor and a jury comprised of African American jurors might accept that explanation, not understanding the cultural implications. But those of us sitting on the sidelines watching this play out know better. 

What we have discovered through our own experiences is that the usage of different names in different languages can be found on deeds and loans and financial transactions of people who function within the religious community. Moshe Mark Nordlicht has three separate identities as do many of the other actors within the communities we investigate. Their homes, their bank accounts, their businesses, their family trusts, their telephone number, their entire lives revolve around the ability to carefully maneurver three uniquely separate identities, one in Hebrew, one in English, on in Yiddish and sometimes iterations of those.  

The language did play a role in encoding the nature of the transactions and this should be something a jury is helped to understand. It is key to the frauds that we have covered on each page of this blog in one form or another, with very few exceptions.

We just hope someone equally matched with the brilliance of the defense team and a cultural understanding of the interactions between the bad actors in this sordid affair is listening and paying attention; and has the ability to convey this to the Platinum Partners’ partners’ jurors.

 

Department of Justice
U.S. Attorney’s Office
Eastern District of New York

FOR IMMEDIATE RELEASE
Monday, December 19, 2016

Platinum Partners’ Founder And Chief Investment Officer Among Five Indicted In A $1 Billion Investment Fraud

Two Additional Individuals Indicted In A $50 Million Bond Fraud Involving Black Elk Energy, One Of Platinum’s Largest Portfolio Companies

BROOKLYN, N.Y. – An eight-count indictment was unsealed this morning in federal court in Brooklyn, New York, charging seven defendants, all of whom are or were formerly affiliated with Platinum Partners L.P. (Platinum), a purportedly $1.7 billion hedge fund based in New York, New York.  The indicted individuals are: Mark Nordlicht, the founder and Chief Investment Officer of Platinum; David Levy, the co-Chief Investment Officer of Platinum; Uri Landesman, the former Managing Partner and President of Platinum; Joseph SanFilippo, the Chief Financial Officer of Platinum’s signature hedge fund; Joseph Mann, a member of Platinum’s Investor Relations and Finance Departments; Daniel Small, a former Managing Director and co-Portfolio Manager of Platinum; and Jeffrey Shulse, the former Chief Executive Officer and Chief Financial Officer of Black Elk Energy Offshore Operations, LLC (Black Elk).[1]

Nordlicht, Levy, Landesman, SanFilippo and Mann are charged with securities fraud, investment adviser fraud, securities fraud conspiracy, investment adviser fraud conspiracy and wire fraud conspiracy for defrauding investors through, among other things, the overvaluation of their largest assets, the concealment of severe cash flow problems at Platinum’s signature fund, and the preferential payment of redemptions.  Nordlicht, Levy, Small and Shulse are charged with securities fraud, securities fraud conspiracy and wire fraud conspiracy for defrauding Black Elk’s independent bondholders through a fraudulent offering document and diverting more than $95 million in proceeds to Platinum by falsely representing in the offering document that Platinum controlled approximately $18 million of the bonds when, in fact, Platinum controlled more than $98 million of the bonds.

Nordlicht, Levy, Landesman, SanFilippo, Mann, Small and Shulse will be arraigned later today before United States Magistrate Judge Lois Bloom at the United States Courthouse, 225 Cadman Plaza East, Brooklyn, New York.  Shulse’s initial appearance for removal proceedings to the Eastern District of New York is scheduled for this afternoon at the United States Courthouse, 515 Rusk Avenue, Houston, Texas.

The charges were announced by Robert L. Capers, United States Attorney for the Eastern District of New York; William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI); and Philip Bartlett, Inspector-in-Charge, United States Postal Inspection Service, New York Division (USPIS).

“As alleged, Nordlicht and his cohorts engaged in one of the largest and most brazen investment frauds perpetrated on the investing public, earning Platinum more than $100 million in fees during the charged conspiracy.  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.  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,” stated United States Attorney Capers.  “The charges and arrests announced today reflect our steadfast commitment to holding accountable hedge funds on Wall Street who rip off investors for personal gain.”  Mr. Capers thanked the Securities and Exchange Commission, New York Regional Office (SEC) for their significant cooperation and assistance during the investigation.

“This case shows how several members of this firm allegedly manipulated and lied to investors about the health of the investments they were making, and then plotted ways to cover up their actions.  The FBI and our law enforcement partners do all we can to stop these schemes and to keep fraudsters from stealing from investors, but we can’t do it alone.  We need people to call us when they see things that don’t add up, or don’t make sense,” stated FBI Assistant Director-in-Charge Sweeney.

“These Platinum Partners employees devised a scheme to lure investors to funds they managed knowing the funds were insolvent and would not return the high yields they claimed. Postal Inspectors will never tolerate unfairness in the market and will vigorously pursue and bring to justice anyone who breaks the law, ensuring there is an honest and secure trading environment for investors,” stated USPIS Inspector-in-Charge Bartlett.

*          *          *

As detailed in the indictment, between 2011 and 2016, Nordlicht and Levy, together with their co-conspirators, orchestrated two separate schemes: (i) a scheme to defraud investors and prospective investors in funds managed by Platinum; and (ii) a scheme to defraud third-party holders of Black Elk’s bonds.

The Fraudulent Investment Scheme

Platinum was a hedge fund founded in 2003 and based in New York, New York.  Since September 2011, Platinum was registered with the SEC as an investment adviser.  Platinum managed several hedge funds, but the vast majority of its assets were invested through Platinum Partners Value Arbitrage Fund, L.P. (PPVA) and Platinum Partners Credit Opportunities Master Fund, L.P. (PPCO).  Platinum charged its investors a two percent management fee and a 20 percent incentive or performance fees.  In March 2016, Platinum reported to regulators, including the SEC, that it had $1.7 billion in assets under management (AUM), including approximately $1.1 billion in gross asset value in PPVA and more than $590 million in PPCO.

Between November 2012 and December 2016, Nordlicht, Levy, Landesman, SanFilippo and Mann, together with others, participated in a scheme to defraud investors and prospective investors in Platinum through lies and omissions relating to, among other things: (i) the performance of some of PPVA’s highly illiquid and privately-held assets; (ii) PPVA’s accessibility to cash or assets that could easily be converted into cash; (iii) the purpose of loans raised through investors and the use of those loan proceeds; and (iv) PPVA’s preferential redemption, or investor payment, process.  Specifically, Platinum fraudulently overvalued some of PPVA’s highly illiquid and privately-held assets in order to, among other things, boost performance numbers, attract new investors, retain existing investors and extract high management and incentive fees.  From 2012 through 2016, Platinum extracted more than $100 million in fees based, in large part, on their overvalued assets.  Platinum’s overvaluation of some of their assets precipitated a severe cash crunch, which Platinum initially attempted to mitigate through high-interest loans between its various hedge funds and related entities.  When the inter-fund loans proved insufficient to resolve PPVA’s cash crunch, Platinum began selectively paying some investors ahead of others, contrary to the terms of its governing documents.

As early as 2012, Nordlicht and his co-conspirators knew that PPVA was in trouble, but concealed that reality from investors and prospective investors.  For example, on November 6, 2012, upon learning that PPVA’s investors had sought $27 million in redemptions, Nordlicht exchanged emails with Landesman that stated, in part: “If we don’t exceed [the $27 million in redemptions] in [subscriptions] . . . we are probably going to have to put black elk in side pocket . . . It’s just very daunting.  It seems like we make some progress and then [redemptions] are relentless almost.  It’s tough to get ahead in [subscriptions] if u have to replace 150-200 a year.”

By 2014, the defendants were relying almost exclusively on new investments and inter-fund loans to pay redemptions to PPVA’s investors.  For example, on April 29, 2014, when faced with requests from investors who had not yet received their redemptions, Nordlicht sent an email to SanFilippo that stated, in part: “Start paying down [redemptions] as [you] can.  Between [a new investor] and [a one-off loan] (additional 10 million), [should] have decent short term infusion.  Hopefully some [M]ay 1 [new investments] show up as well.  Have a few more outflows to discuss but this is obviously the priority.”  Nordlicht and his co-defendants concealed PPVA’s cash crunch and selective redemption payments from investors.  For example, in an investor call on January 14, 2015, Nordlicht stated, in part: “If we look historically, we’ve been very very fortunate . . . we’re running about a billion four between all our different entities . . . I think we’ve returned about double that in cash to investors, so that is really an indication of . . . being very very liquid and nimble . . . in terms of 2015 for PPVA, we are targeting much higher returns than normal.”

Nordlicht’s and Landesman’s knowledge of Platinum’s dire situation was perhaps best illustrated by an email exchange on December 13, 2015.  When Nordlicht forwarded an email to Landesman where he had informed a co-conspirator that his wife was convincing him to get on a flight to Israel if he was unable to get a loan from his partners to save the fund, Landesman responded: “You should get on the flight if there is no bridge [loan], probably even if there is . . . We need to go through the mehalech of how we are going to share this with clients and employees, going to be very rough, big shame . . . it was nice seeing you, hopefully the girls will reacclimate [sic] quickly.”  Notwithstanding the above email exchange, on February 7, 2016, Landesman sent an email to an investor that stated, in part: “Fund is sound, I believe, new structure ideal.  Mark [Nordlicht] is really energized.  Hope to be beyond liquidity concerns forever by end of May, we welcome your further investment.”

PPVA was heavily invested in oil and gas companies that performed significantly below expectations and the valuations that Platinum attributed to them.  These valuations were further undermined by the plummeting price of oil, which dropped from approximately $105 per barrel in December 2013, to approximately $60 per barrel in December 2014, to approximately $36 per barrel in December 2015.

Despite the severe problems that PPVA was facing beginning in at least 2012, Platinum reported that PPVA’s AUM increased from approximately $727 million at the end of 2012, to approximately $757 million at the end of 2013, to approximately $770 million at the end of 2014, to approximately $910 million at the end of 2015.  Platinum collected two percent management fees off these amounts and 20 percent incentive fees off the profits.

The Fraudulent Black Elk Bond Scheme

From approximately November 2011 to December 2016, Nordlicht, Levy, Small and Shulse, together with their co-conspirators, orchestrated a fraudulent scheme to defraud third-party holders of Black Elk’s publicly-traded bonds (the bondholders) by diverting the proceeds from the sale of the vast majority of Black Elk’s most lucrative assets to Platinum even though the bondholders had priority over Platinum’s equity interests.  As early as November 2011, Nordlicht, Levy and Small were plotting to deceive the bondholders.  For example, when Nordlicht learned about the relevant covenants associated with the bonds, he sent an email to Levy, Small and another that stated: “Seem like there are bond[s] to be had out there and an additional 60 million is 24 down . . . We [would] have to figure it out . . . I’m sure we can get them in friendly hands if the covenants are going to be an obstacle.”

By late 2013, faced with the fact that Black Elk was effectively insolvent but knowing that Black Elk still possessed certain valuable assets, the defendants pursued opportunities to sell Black Elk’s assets while simultaneously pursuing a fraudulent strategy to divert the proceeds from any such asset sale to the preferred equity stockholders, which were controlled by Platinum, instead of the bondholders.  To execute this scheme, in early 2014, the defendants caused Platinum to purchase Black Elk bonds on the open market to gain control of a majority of the $150 million of outstanding bonds.  Platinum purchased and then transferred the bonds through a number of related entities in an effort to conceal Platinum’s ownership and control of the bonds.

By approximately April 2014, Platinum owned and controlled approximately $98 million of the $150 million of outstanding bonds.  Between March 2014 and April 2014, Platinum and its related parties also purchased the vast majority of the outstanding preferred equity that was owned by third parties to obtain nearly 100 percent ownership of the preferred equity.  By approximately May 2014, when alternative approaches failed, the defendants, together with others, determined that the only path to getting the preferred equity paid ahead of the bondholders was through a cash tender offer and consent solicitation process.  On July 2, 2014, Small forwarded an email from a Platinum trader to Nordlicht and Levy that set forth the following summary of the $98,631,000 of the bonds controlled by Platinum: (i) PPCO: $32,917,000; (ii) PPVA: $18,321,000; (iii) PPLO: $17,046,000; (iv) BAM [a related entity]: $13,360,000; and (v) BBIL [a related entity]: $16,987,000.  Nevertheless, in response to a query from an attorney, on July 9, 2014, Small sent an email that stated, in part: “$18,321,000 bonds are controlled by PPVA and should be disclosed and excluded from the calculation.  I believe this implies that $65,840,000 are required to obtain a majority consent.”

On July 16, 2014, Black Elk announced that it had commenced a public offer for the bonds (the Consent Solicitation).  The Consent Solicitation and accompanying press release provided, among other things, that: (i) Black Elk had commenced a cash tender offer to purchase the outstanding bonds at par value; (ii) Black Elk was soliciting bondholders’ consents to modify certain of the restrictive covenants governing the bonds; (iii) the bondholders that tendered their bonds would be considered to have validly delivered their consent to the proposed amendments; (iv) the bondholders could also consent to the proposed amendments without tendering their bonds; (v) the Consent Solicitation was being made in connection with the sale of assets and the net proceeds of the sale would be used by Black Elk to purchase the tendered bonds; and (vi) the offer would expire at 5:00 p.m. New York time on August 13, 2014.

Notably, the Consent Solicitation prohibited “any person directly or indirectly controlling or controlled by or under direct or indirect common control with [Black Elk]” from voting in the Consent Solicitation process.  Thus, the approximately $98 million of bonds controlled by Platinum should have been excluded from the voting process.  Nonetheless, the defendants caused Black Elk to disclose in the Consent Solicitation that: “[PPVA] and its affiliates, which own approximately 85% of our outstanding voting membership interests, own[ed] approximately $18,321,000 principal amount of the outstanding Notes.  Otherwise, neither we, nor any person directly or indirectly controlled by or under direct or indirect common control with us, nor, to our knowledge, any person directly or indirectly controlling us, held any Notes.”

The defendants then caused Platinum’s related parties to consent to the proposed amendments but not tender their bonds.  As of the offer’s expiration on August 13, 2014, bondholders that held $11,333,000 of the BE Bonds validly had tendered and were paid.  To the surprise of the remaining bondholders, who were unaware of Platinum’s control of $98,631,000 or approximately 65 percent of the BE Bonds, the trustee revealed that the holders of $110,565,000 or approximately 73.71 percent of the bonds had validly consented to the Consent Solicitation, thereby allowing the preferred equity to get paid from the proceeds of Black Elk’s sale of assets.

On or about August 11, 2015, Black Elk’s creditors filed a petition to place the company into an involuntary Chapter 7 bankruptcy, which was converted on or about September 1, 2015 to a voluntary Chapter 11 bankruptcy.  As of December 2016, a number of bondholders who did not tender their BE Bonds have yet to receive the principal amount of their holdings.

*          *          *

The criminal case has been assigned to Chief Judge Dora L. Irizarry of the United States District Court.  If convicted, each of the defendants faces a maximum sentence of 20 years’ imprisonment.

The government’s case is being prosecuted by the Office’s Business and Securities Fraud Section.  Assistant United States Attorneys Winston Paes, Alicyn Cooley, Lauren Elbert and Sarah Evans are in charge of the prosecution, with assistance provided by Assistant United States Attorney Brian Morris of the Office’s Civil Division.

*          *          *

The charges were brought in connection with the President’s Financial Fraud Enforcement Task Force.  The task force was established to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes.  With more than 20 federal agencies, 94 U.S. attorneys’ offices, and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud.  Since its formation, the task force has made great strides in facilitating increased investigation and prosecution of financial crimes; enhancing coordination and cooperation among federal, state and local authorities; addressing discrimination in the lending and financial markets; and conducting outreach to the public, victims, financial institutions and other organizations.  Since fiscal year 2009, the Justice Department has filed over 18,000 financial fraud cases against more than 25,000 defendants.  For more information on the task force, please visit http://www.StopFraud.gov.

The Defendants:

MARK NORDLICHT
Age: 48
Residence: New Rochelle, New York

DAVID LEVY
Age: 31
Residence: New York, New York

URI LANDESMAN
Age: 55
Residence: New Rochelle, New York

JOSEPH SANFILIPPO
Age: 38
Residence: Freehold, New Jersey

JOSEPH MANN
Age: 24
Residence: Brooklyn, New York

DANIEL SMALL
Age: 47
Residence: New York, New York

JEFFREY SHULSE
Age: 44
Residence: Houston, Texas

E.D.N.Y. Docket No. 16-CR-640 (DLI)

 


 

[1] The charges announced today are allegations, and the defendants are presumed innocent unless and until proven guilty.

Topic(s):
Financial Fraud
Securities, Commodities, & Investment Fraud
StopFraud
Updated December 19, 2016

CNO and Beechwood Re: The Platinum Zeroth’s Law and the Money that Isn’t Created Nor Destroyed, It Just Changes Hands

FINANCIAL ENTROPY, THE THERMODYNAMICS OF PLATINUM PARTNERS’ MONEY AND ZEROTH’S LAW AS IT APPLIES TO THE DIFFERENT STRATEGIES

[To be updated]

Dear Reader:

The notion of entropy in thermodynamics is chaos. The same is true, in very simplified terms, of financial entropy. Investors who manage to understand the chaos of a given set of financial principles are generally the ones who fare the best. Investors who can manipulate the entropy and maneuver it are magicians. Platinum Partners chief strategists were and have always been that, financial magicians. We give them credit.

Understanding how the pieces fit together is key to understanding the magnitude and complexity of the slight of hand of Platinums’ partners. It is like they were counting multiple decks in a casino and doing so flawlessly, until they weren’t.

Platinum Parterns’ connections to Beechwood Re and to CNO were integrally intertwined. Each one was intended to provide Platinum with a more diverse portfolio of investments, though CNO claims there was some distance between itself and Platinum, that Beechwood was an intermediary and they did not know the involvement. It is our contention that Beechwood Re was Platinum’s alter-ego. As to CNO, that is a bit less clear. 

Beechwood Re  was an extremely clever and somewhat macabre strategy for making money. It required that nursing home patients take out insurance policies written to the benefit of the nursing homes and then to die quickly.  The key, as we saw it at the time, was in knowing who would die and when. Sadly, the success of that strategy required the Platinum/Beechwood guys to get that information from someone in the nursing home business willing to either or both of convince the patients to sign over policies and to then share that information outside of the privacy considerations of the patients. We have a idea who it was, an odd connection to President Trump and someone he met in the 80’s and who had an integral understanding of long term care and the associated insurance. As to that story, that’s for another day. 

In 2014, Beechwood Re had obtained significant funding from CNO, a “reinsurer” who was providing insurance on the insurance policies held by Beechwood. The policies being written for CNO were “backstopping” the Beechwood policies. And the CNO policies, it would appear to have been long-term care policies and not necessarily life insurance.

CNO’s problem at the time was that it had underwritten numerous “long-term-care insurance” policies in the 1980’s and the payouts 25-30 years later were far higher than anticipated. In the best of circumstances, they would have made enough money with their own investment strategies on those policies over the 25-30 intervening years that they would not have been struggling. The calculations for an underwriter for long-term care insurance is based in part on actuarial tables and the health of the population. For CNO to have been a lucrative endeavor, they would have had to invest well and people would have needed to drop dead long before they utilized the policies. For the few who manage to live long enough to use the underlying policy for which they have paid a lifetime, the hope of the insurer is that the care required would be less than the money made during the intervening years. What policy underwriters at the time did not consider was the rising costs of healthcare, that people would live longer and spend more time in long term care.

For Beechwood, the relationship with CNO initially provided it with a reputable firm, the sharing of capital and resources and an underlying “good-will”. In addition, CNO had relationships with other banks and other underwriters, as did Beechwood (through the Platinum guys) and as such, the two entities could name drop for the purposes of working together and as a cost-benefit to one another. The two insurance strategies were slightly different. Whether or not CNO knew Beechwood was an arm of Platinum is unclear and in retrospect, they likely would have stuck with Beechwood regardless so long as the money was flowing.

Beechwood has argued that they were not and alter-ego of Platinum and actually they, too were the victims of a the fraud. That is not even a rational argument, particularly given the familial relationships involved. Beechwood was, to simplify the story,  a feeder fund for Platinum and one of its many investment vehicles or arbitrage funds, just an altogether different strategy. 

CNO on the other hand, may have been a victim of Platinum; but we believe it was also a victim of its own poor planning and greed. We also believed that even when they realized they were dealing with Platinum they made a choice to stay in the game. Platinum at the time was coining money. 

But then there’s “Black Elk”. The Black Elk investment strategy was oil. Black Elk had discovered a clever way to drill the remnants of other wells and obtain the smaller amounts of oil at the bottom of old wells. It is akin to trying to get the last drop of cola from a can. If you can figure out how to get all of the drops out of all of the cans and resell  the cola bottled differently, you can make money. That was the theory behind Black Elk. But no matter which way you play it, once the CEO was removed from his position, Black Elk was, in simple terms, another of Platinum’s feeder funds. 

The people involved were ultimately the same:  Moshe Mark Nordlicht, David Levy,  Moshe “Mark” Feuer, Jeffrey Shulse (who has argued his innocence) [https://casetext.com/case/united-states-v-nordlicht-2] Josephe SanFilippo, Scott Taylor [https://dockets.justia.com/docket/new-york/nysdce/1:2018cv12018/507059], Murray Huberfeld and a number of other Platinum Partners’ partners.

There are dozens of people whom we would argue should have been indicted, who were also original owners and/or initial investors in some of these strategies and were either family members or had previous relationships with the main funds’ players. How they have so far managed to remain outside the numerous indictments perplexes us.

Unfortunately for Platinums’ partners, we believe that the partners knew everything. There were no blind, deaf and dumb people playing in this game. There were no secrets amongst the men involved, just as there are no secrets the neighborhood where many of these men lived only blocks from one another. Many of these men were also related to one another, uncles, cousins, brothers. These were people who in large part had worked together before like Oceans 11 and were going to work together again like in Oceans 12 and 13. And, just like in the movies, they were extremely clever.

The strategies were hedged against one another. They could have gone on for years had a perfect storm of evens not occurred: Black Elk has an explosion on one of its rigs killing some of it’s employees, Beechwood being compelled to payout more than anticipated, and outside investors not deciding the funds’ returns were simply too high. 

Had Platinum Partners’ top brass not been so greedy, they would have succeeded in defrauding the financial systems. But, like Zeroth’s law of thermodynamics: “If two systems are each in thermal equilibrium with a third system, they are in thermal equilibrium with each other.” Similarly, Black Elk was an alter-ego of Platinum Partners as was Beechwood Re. They were also an alter ego of one another. How CNO fits into this, it remains to be seen. We can’t discount he possibility that they were also in thermal equilibrium with Platinum.

Beechwood Re

Cayman Islands authorities to wind up Beechwood Re following fraud scandal

29th November 2018

The Grand Court of the Cayman Islands has approved a petition for the winding up of Beechwood Re, a locally domiciled reinsurer that is being sued for fraud in the U.S and has ties to the hedge fund Platinum Partners, which collapsed after a federal investigation last year. Grand Court Justice … Read the full article

Beechwood sold after reputation loss from Platinum Partners scandal

3rd August 2017

Beechwood, a group of reinsurance and asset management companies, has been sold in a last ditch attempt to salvage the firm instead of shutting it down after it suffered reputation loss when hedge fund Platinum Partners collapsed after a federal investigation, Reuters reported. Platinum’s top executives and founder were arrested … Read the full article

 

 

Beechwood Re To Close $590 Million Reinsurance Transaction

Beechwood Re, Ltd. to Reinsure In-Force Long-Term Care Liabilities of CNO Financial Group Subsidiaries


NEWS PROVIDED BY

Beechwood Re, Ltd. 

Feb 12, 2014, 09:56 ET

W YORKFeb. 12, 2014 /PRNewswire/ — Beechwood Re, Ltd., a life reinsurer, announced today that it had executed definitive documents to complete a reinsurance transaction with subsidiaries of CNO Financial Group, Inc. (CNO).

(Logo: http://photos.prnewswire.com/prnh/20140212/NY63663LOGO )

The deal will have CNO’s subsidiaries cede $550 million of statutory reserves and approximately $40 million of other capital associated with closed blocks of long-term care insurance underwritten by Bankers Conseco Life Insurance Company and Washington National Insurance Company.  The reinsurance transaction and associated structures have obtained all required regulatory approvals necessary to proceed.

“We are very pleased to have entered into this agreement with CNO,” said Beechwood Re CEO Mark Feuer.  “These transactions exemplify the creative reinsurance solutions that Beechwood Re has to offer.  We look forward to working with our new partner through a smooth transition and providing them with ongoing reinsurance support.”

Ed Bonach, CEO of CNO said, “Our reinsurance agreements represent a meaningful step forward in addressing our run-off business. We are pleased to have Beechwood Re as our partner in this transaction and look forward to a successful relationship moving forward.”

As a part of the transaction, Bankers Conseco and Washington National will transfer to Beechwood the in-force reserves and liabilities associated with the blocks of business.  The transactions are to be completed on a 100% coinsurance basis, with Beechwood holding reserves and required over-collateralization in trusts, with investment guidelines and periodic true-up provisions.

Fuzion Analytics, of Carmel, Indiana, will provide data analytics and coordination of Third Party Administration services on behalf of Beechwood Re to ensure best-in-class policyholder services following the transition.  Willis Re, a global reinsurance intermediary, was instrumental in the deal, led by Michael Kaster of their Life Solutions Group.

The transaction is expected to be fully consummated by the end of February.

About Beechwood Re, Ltd and Beechwood Bermuda International Ltd.

The Beechwood family of companies includes Beechwood Re, a reinsurer domiciled in Grand Cayman and regulated by the Cayman Islands Monetary Authority (CIMA), and Beechwood Bermuda International Ltd., a licensed long-term insurer located in Hamilton, Bermuda and regulated by the Bermuda Monetary Authority (BMA).  The companies were formed with the belief that there is a shortage in attractive capacity for the life markets, driven by a need for flexibility and creativity in underwriting the life and annuity reinsurance market associated with asset risk.  The Beechwood companies provide life and annuity reinsurance to primary insurance companies in the United States and Internationally.  Beechwood seeks to provide flexibility for companies to manage their balance sheets and risk profiles through a variety of solutions.  Target markets include reinsuring in-force blocks and ongoing quota-shares of fixed and indexed annuities, in addition to in-force, closed blocks of long-term care and long-term disability policies for primary writers.

More information is available by contacting Susan Sweetin, Media Relations at ssweetin@beechwoodreinsurance.comor (212) 260-5050 ext. 204

SOURCE Beechwood Re, Ltd.

Platinum Partners, Nordlicht, CNO Financial Broup, Beechwood Re and… Well… Another Fraud

CNO stuck in nightmare over alleged hedge fund fraud

 

CNO Financial Group’s top executives are a conservative lot who have spent much of the past decade stabilizing and reducing the risk profile of the Carmel-based insurer.

So imagine their surprise when they got caught up in what prosecutors have described as perhaps the biggest fraud since Bernie Madoff.

The saga began in late 2013 with a deal CNO struck to offload exposure to long-term-care insurance policies that had the potential to saddle the company with big losses down the road.

CNO brass say they didn’t know it at the time, but the company’s partner in the transaction, Beechwood Re Ltd., turned out to be intertwined with the New York-based hedge fund Platinum Partners—whose leaders, prosecutors say, were masterminds of a $1 billion investment fraud.

Platinum Partners co-founder Mark Nordlicht and three other executives of the now-defunct hedge fund are currently on trial in Manhattan, but the nightmare won’t end for CNO when the jury issues its verdicts. CNO, which took a $75 million pre-tax charge in 2016 stemming from Platinum-related losses, is mired in lawsuits—both as a plaintiff and as a defendant—that likely will take years more to play out.

A CNO spokeswoman declined to make an executive available to discuss the Platinum fallout. But CNO’s account of what transpired is laid out in a lawsuit the company filed in 2016 that remains pending against Beechwood and its principals.

The suit charges that conspirators used Beechwood as a front to funnel cash into the embattled hedge fund Platinum Partners, which was in dire need of capital.

“Beechwood’s massive and risky investments with Platinum … was the goal of the fraudulent scheme hatched by defendants to bamboozle institutional investors like [CNO] out of their money by tricking them into indirectly investing with Platinum,” the lawsuit alleges.

The defendants steered the case into arbitration last year, over CNO’s objection. CNO says in a regulatory filing that it intends to “vigorously pursue” damages in the arbitration and in court.

Painful chapter

No doubt, CNO officials wish they never had engineered the deal with New York-based Beechwood, which was aimed at offloading the risks associated with a $550 million block of long-term-care insurance.

CNO is among a litany of U.S. insurers zinged by an aggressive push into long-term-care insurance, which covers nursing home and prescription costs, after the policies became popular in the 1980s. Industrywide, insurers found payouts far exceeded projections.

As part of its so-called reinsurance agreement, CNO shifted $550 million into a Beechwood-managed trust, with Beechwood poised to pocket the upside if investments outperformed or claims proved smaller than expected. On the other hand, Beechwood would have to pump in capital if reserves fell below required levels.

Beechwood was a startup, and CNO was its first customer. Nonetheless, CNO deemed it on the up and up, given that its purported founders were reputable industry veterans—former Marsh USA CEO Moshe “Mark” Feuer and Scott Taylor, a former Marsh & McLennan executive who also had helped lead Merrill Lynch’s wealth management division.

But in its lawsuit, CNO alleges the pair conspired with Platinum executives on a secret scheme that used Beechwood as a “piggybank” to prop up and fund the teetering Platinum hedge fund.

The suit says that, while Platinum claimed to rack up outsized returns averaging 17 percent a year from 2003 to 2015, those figures were inflated. In reality, by 2014, Platinum was relying almost entirely on new investments and loans to scrape together the cash needed to pay off investors who redeemed their holdings, according to the complaint.

CNO said it began noticing Platinum-related investments in reports it was getting from Beechwood that year. But when it raised concerns that they were unsuitably risky for an insurer, Beechwood reassured the company that they were appropriate and were accurately valued—assertions CNO says proved to be false.

CNO’s worry turned to alarm in the summer of 2016, after prosecutors charged Platinum Partners co-founder Murray Huberfeld with bribing a union official into investing $20 million in Platinum, and federal agents raided the hedge fund’s offices as part of a fraud probe.

CNO contends in its suit that company insiders went to great lengths to conceal the Beechwood-Platinum connection. When CNO asked about the source of the funds used to capitalize Beechwood, Beechwood refused to say, citing “confidentiality agreements.”

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