Law360 (June 24, 2019, 4:19 PM EDT) — A New York federal judge on Friday kept alive portions of Platinum Partners‘ liquidators’ lawsuit over the hedge fund’s collapse, finding in part that a Second Circuit rule doesn’t protect alter egos of Platinum from liability.
U.S. District Judge Jed Rakoff agreed with the liquidators that alleged Platinum alter ego Beechwood Capital Group LLC — a set of reinsurance and asset management companies — is not protected from liability by the Second Circuit’s 1991 ruling in Shearson Lehman Hutton Inc. v. Wagoner, which established that a plaintiff lacks standing to sue third parties over misconduct for which it shares equal blame.
Beechwood argued in April that, under Wagoner, the liquidators, as successors-in-interest to Platinum Partners Value Arbitrage Fund LP, can’t now attempt to recover funds from outsiders for the alleged $1 billion fraud carried out by Platinum’s top management and officers. But the liquidators countered that the Wagoner rule and a similar “in pari delicto” defense, Latin for “in equal fault,” don’t protect corporate insiders or alter egos, as Beechwood is alleged to be.
“As this court has explained, the rationale behind the insider exception is that ‘it would be absurd to allow a wrongdoing insider to rely on the imputation of his own conduct to the corporation as a defense,'” the court said Friday. “This rationale applies with equal force to alter egos of insiders, to whom the conduct is also imputed.”
Judge Rakoff said he doesn’t consider as insiders executives at Beechwood entities including Mark Feuer, Scott Taylor and Dhruv Narain, and other individuals allegedly involved in misconduct such as Michael Nordlicht, Kevin Cassidy, Seth Gerszberg and Michael Katz.
For nearly all of those individuals, however, the court said another exception to the Wagoner rule related to the abandonment of corporate interests applies, and refused to dismiss certain claims against them. Of these individuals, only Katz escaped the allegations entirely, with the court finding it would need to engage in inappropriate speculation to keep aiding-and-abetting claims against him alive.
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.
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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On December 19, 2016, the United States Attorney’s Office for the Eastern District of New York announced the indictments of seven individuals who were then or were previously associated with Platinum Partners. The same day, the U.S. Securities and Exchange Commission filed a civil complaint in the United States District Court for the Eastern District of New York against the same individuals, along with certain Platinum corporate entities. Together with its complaint, the SEC asked the Court to appoint a Receiver over several Platinum entities affiliated with Platinum Partners Credit Opportunities Master Fund LP and Platinum Partners Liquid Opportunity Master Fund LP. The Court appointed Bart M. Schwartz as Receiver. Important filings in these cases are linked below. This page will be updated regularly.
U.S. Securities and Exchange Commission Filings
- 07.05.17 SEC Reply in Further Support of OSC
- 06.30.17 Notice and Standing Order — A number of “interested parties,” consisting of purported creditors or victims of the defendants as a result of the securities and wire fraud alleged in this case, through their attorneys, have added themselves to the docket of this case, without seeking leave of the Court to do so. In some cases, the attorneys are admitted to practice in this Court, in others, the attorneys have sought leave to appear pro hac vice and those applications have been denied by order entered today. ANY PERSON, PERSONS, OR ENTITIES WHO ALLEGE TO BE CREDITORS OR VICTIMS ARE HEREBY PROHIBITED FROM ADDING THEMSELVES TO THE DOCKET OF THIS CASE. SUCH PERSONS SHOULD COMMUNICATE EITHER WITH THE SEC OR THE U.S. ATTORNEY’S OFFICE OF THIS DISTRICT AS THEY REPRESENT THE AGGRIEVED IN THIS CASE. None of these parties have been given leave by the Court to intervene in this action. Indeed, some never sought leave to do so. Moreover, by inappropriately adding themselves to the docket, they have created problems with the ECF system in this case. Finally, other individuals have faxed letters to chambers without first seeking permission to do so. FAXING TO CHAMBERS IS BY PERMISSION OF THE COURT ONLY. While the Court is mindful that there are victims in this case, the Court will not tolerate any violations of Court rules or procedures. NO FILINGS OR APPEARANCES WILL BE PERMITTED, UNLESS THEY ARE PERSONS WHO ARE NAMED IN THE COMPLAINT AND WHO HAVE BEEN GIVEN EXPLICIT PERMISSION OF THE COURT TO APPEAR. THE COURT WILL NOT ENTERTAIN ANY MOTION TO INTERVENE BASED SOLELY ON THE FACT THAT THE PROPOSED INTERVENOR IS A VICTIM OR CREDITOR. AGGRIEVED PERSONS SHALL CONTACT THE SEC AND THE U.S. ATTORNEY’S OFFICE FOR THE EASTERN DISTRICT OF NY AND THOSE ENTITIES ARE DIRECTED TO PRESENT THOSE POSITIONS TO THE COURT AND DEFENDANTS. SO ORDERED by Chief Judge Dora Lizette Irizarry on 6/30/2017.
- 06.30.17 Letter seeking an Order Authorizing the Receiver to Retain and Pay Reed Smith by Bart M. Schwartz
- 06.30.17 Motion for Leave to File Reply in Further Support of Motion for Entry of Second Amended Order Appointing Receiver and Appointing Substitute Receiver by United States Securities and Exchange Commission
- 06.30.17 Letter seeking retention of Deloitte Tax LLP by Bart M. Schwartz
- 06.30.17 Letter MOTION for Leave to File Statement of Position Concerning the SEC’s Application to Appoint a New Receiver by Beechwood Re Limited, Beechwood Bermuda International Ltd.
- 06.30.17 Letter to the The Honorable Dora L. Irizarry regarding the Receiver’s Proposed Order, by Mark Nordlicht, Platinum Management (NY) LLC
- 06.30.17 Letter in response to the Letter for Approval of Resignation of Receiver by Bart M. Schwartz, the Application for an Order to Show Cause for Entry of a Second Amended Order Appointing Receiver
- 06.30.17 Letter to Honorable Dora L. Irizarry in accordance with the Court’s June 27, 2017 Order by Schafer and Weiner, PLLC
- 06.30.17 Letter Regarding Information Sharing Agreement from Levy
- 06.30.17 Independent Investor Letter Regarding OSC
- 06.30.17 Letter from Walla Regarding Arabella
- 06.29.17 Individual Defendants Response Regarding Bart M. Schwartz Resignation
- 06.29.17 Heartland Bank Response Regarding Bart M. Schwartz Resignation
- 06.28.17 Letter to The Honorable Dora L. Irizarry respectfully responding to the SEC’s motion in accordance with the Court’s Order dated June 27, 2017 by David Levy
- 06.28.17 Independent Investor letter Regarding Resignation
- 06.28.17 Letter Application for an Order Authorizing the Retention and Payment of Limited Scope Legal Professionals by Bart M. Schwartz
- Exhibit 1 – Declaration of Daniel M. Burstein, executed June 28, 2017
- Exhibit 2 – Fee Application of Hoover Slovacek, LLP
- Exhibit 3 – Fee Application of Cooper & Scully, P.C.
- Exhibit 4 – Fee Application of Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing P.C.
- Exhibit 5 – Fee Application of Barrasso Usdin Kupperman Freeman & Sarver, LLC
- Exhibit 6 – Fee Application of Benesch, Friedlander, Coplan & Aronoff LLP
- Exhibit 7 – Fee Application of Ganfer & Shore, LLP
- Exhibit 8 – Fee Application of Bryan Cave LLP
- Exhibit 9 – Fee Application of Maslon LLP
- Exhibit 10 – Fee Application of Morrison Cohen, LLP
- Exhibit 11 – Certification of Paneth & O’Mahony, PLLC
- Exhibit 12 – Fee Application of Virtus Law LLP
- Exhibit 13 – Certification of Stikeman Elliot LLP
- Exhibit 14 – Fee Application of Walkers
- Exhibit 15 – Fee Application of Chediak Advogados
- Exhibit 16 – Fee Application of Leite, Tosto E Barros Advogados Associados
- Exhibit 17 – Certification of Allen & Overy LLP
- Exhibit 18 – Certification of Demarest Advogados
- Exhibit 19 – Fee Application of Kessler Collins, P.C.
- Exhibit 20 – Fee Application of O’Connell Law, PLLC
- Exhibit 21 – Proposed Order
- 06.27.17 Order Response to Motion, filed by Heartland Bank, Letter filed by David Levy, Joseph Mann, Uri Landesman, Jeffrey Shulse, Daniel Small, Joseph Sanfilippo, Mark Nordlicht — The Individual Defendants’ and Heartland Bank’s request to be heard in connection with the application by the SEC for the appointment of a new receiver is granted. The Court already has entered a scheduling order and will hear the parties further on July 7, 2017. Said parties are to file their written responses to the SEC’s motion NO LATER THAN JUNE 30, 2017 BY 3:00 PM AND PROVIDE HARD COPIES TO CHAMBERS BY THEN AS WELL. The Individual Defendants in their letter seem to make a number of arguments in opposition to the SEC’s request; any additional arguments shall be presented to the Court in the filing due on June 30, 2017. The parties should also indicate whether they would approve of Melanie Cyganowski as the new receiver should the Court grant the SEC’s application. NO EXTENSIONS WILL BE GRANTED. With respect to the conference to be held on July 7, 2017, the parties should be prepared to address whether decision on any pending motions made by the Receiver for various authorizations should be stayed pending the Court’s decision on the motion to appoint a new receiver. SO ORDERED by Chief Judge Dora Lizette Irizarry on 6/27/2017.
- 06.27.17 Letter in response to the SEC’s letter dated 6/21/17 by Bart Schwartz
- 06.27.17 Letter by United States Securities and Exchange Commission
- 06.27.17 Order denying Motion for Hearing — As an initial matter, the letter requesting a hearing concerning the payment of compensation for past employment to two employees was addressed to the Hon. Kiyo A. Matsumoto, U.S.D.J., who is not assigned to this case. It should have been addressed to the undersigned. For the reasons set forth in the letter filed by the current Receiver opposing the disbursement, which is joined in by the SEC, the request to lift the stay imposed in December 2016 Order appointing the Receiver, and amended in January 2017, is denied. The employees stand in the same position as other creditors and victims in this case. Moreover, given that a new receiver likely will be appointed, it is inappropriate to grant any such request at this time. SO ORDERED by Chief Judge Dora Lizette Irizarry on 6/27/2017.
- 06.27.17 Order denying Motion for Leave to Electronically File Document under Seal ; denying Motion for Leave to Electronically File Document under Seal — The SEC’s request to file under seal its letter regarding the termination of the Receivership of Mr. Bart M. Schwartz (“Receiver”) is denied. The SEC set forth no factual basis warranting the filing under seal other than representing that it contained certain “sensitive matters bearing on the Receivership.” Particularly disturbing is that counsel for Defendants Nordlicht and Platinum Management (NY), LLC (PMNY), in opposing the sealing, notes that, in effect the motion was made ex parte, as the SEC refused to provide the document it seeks to seal, but advised counsel that, if the court granted the motion to seal, the SEC would not oppose any motion to unseal it. The Court agrees with counsel that, by its conduct, the SEC improperly filed a document ex parte without leave of the Court and without proper notice to the parties. Moreover, the SEC’s representation clearly indicates that sealing is not necessary, but rather a sheer waste of the Court’s time and resources and perhaps gamesmanship, which this Court previously advised the parties it would not tolerate. The Receiver’s request to file its document under seal also is rejected, because his request is made solely on the basis that the SEC filed its papers under seal. ALL PARTIES ARE HEREBY ADMONISHED THAT UNDER NO CIRCUMSTANCES IS ANY PARTY TO MAKE AN APPLICATION FOR THE SEALING OF ANY DOCUMENT VIA ECF ON ITS OWN. NOR IS ANY PARTY TO FILE ANY DOCUMENT UNDER SEAL. IF A PARTY WISHES TO FILE A DOCUMENT UNDER SEAL, A PDF OF THE DOCUMENT SHALL BE EMAILED TO MY CASE MANAGER, CHRISTY CAROSELLA, AND TWO HARD COURTESY COPIES ARE TO BE FORWARDED TO HER ATTENTION FORTHWITH. IF THE SEALING IS GRANTED, THEN THE COURT WILL HAVE THE DOCUMENT FILED UNDER SEAL. ANY PARTY VIOLATING THIS PROCEDURE WILL BE SANCTIONED AND ANY DOCUMENT FILED UNDER SEAL IN CONTRAVENTION OF THIS ORDER SHALL BE STRICKEN SUMMARILY. Finally, despite previous admonitions to the parties to provide 2 hard courtesy copies of all filings to chambers immediately upon filing, the Court is not receiving hard courtesy copies of filings by all parties. The parties are reminded again to provide 2 hard courtesy copies to chambers IMMEDIATELY upon filing, such that they are received NO LATER THAN THE NEXT BUSINESS DAY BY 4:00 PM. SO ORDERED by Chief Judge Dora Lizette Irizarry on 6/27/2017.
- 06.27.17 Scheduling Order regarding the Unsigned Order to Show Cause filed by United States Securities and Exchange Commission — A Show Cause Hearing will be held on July 7, 2017 at 10:30 AM in Courtroom 4 A South. So Ordered by Chief Judge Dora Lizette Irizarry on 06/27/2017.
- 06.26.17 Heartland Bank Letter Regarding New Receiver
- 06.26.17 Individual Defendants Letter Regarding New Receiver
- 06.26.17 SEC Unsigned OSC Regarding New Receiver
- 06.26.17 Declaration of Neal Jacobson In Support of OSC
- 06.26.17 Declaration of Melanie Cyganowski
- 06.26.17 SEC Second Amended New Receiver Order Redlined
- 06.26.17 SEC Second Amended New Receiver Order
- 06.26.17 SEC MOL in Support of OSC Regarding New Receiver
- 06.26.17 Proposed Order Regarding New Receiver
- 06.26.17 SEC Application for an Order to Show Cause for Entry of a Second Amended Order Appointing Receiver and Appointment of a Substitute Receiver
- 06.23.17 Stipulation Regarding Information Sharing
- 06.23.17 Monitor Resignation Letter
- 06.08.17 Letter regarding First Joint Interim Application of Receiver and Guidepost Solutions, LLC for Allowance of Compensation and Reimbursement of Expenses by Bart Schwartz
- 06.08.17 Letter Regarding Fee Applications by United States Securities and Exchange Commission
- 06.08.17 Letter regarding the First Application of Cooley LLP for Allowance of Compensation and Reimbursement of Expenses by Bart Schwartz
- 06.02.17 SEC Response to Novak Employee Letter
- 05.31.17 Status Letter Regarding Fee Applications by United States SEC
- 05.31.17 Receiver Response to Novak Employee Letter
- 05.30.17 First Motion for Hearing to Lift Stay so Employees Can Sue to Obtain Payment for Past Services
- 05.30.17 Letter Responding to Plaintiff’s 05.19.17 Letter by David Levy
- 05.26.17 Letter Responding to Plaintiff’s 05.19.17 Letter by Mark Nordlicht, Platinum Management (NY) LLC
- 05.24.17 Letter Submitting Cooley’s First Fee Application by Bart Schwartz
- 05.24.17 Letter Submitting Receiver and Guidepost’s First Fee Application by Bart Schwartz
- 05.19.17 Status Letter to Court
- 05.17.17 Settlement Agreement – Platinum Partners and Black Elk
- 04.27.17 First Quarterly Report
- 04.18. 17 Letter in Further Response to Receiver Request
- 04.14.17 Letter Providing Additional Information to Aid the Court’s Consideration of the Receiver’s 03.23.2017 Letter
- 04.04.17 Letter in Further Response to Receiver Request
- 03.31.17 Letter for Chief Judge Dora L. Irizarry
- 03.30.17 Letter In Response to the Receiver’s Request to Expand the Scope of the Current Receivership
- 03.29.17 Letter in Response to Receiver Request
- 03.23.17 Letter on Behalf of the Receiver Respectfully Requesting that this Court Expand the Scope of the Current Recivership
- 03.23.17 Letter on Behalf of the Receiver Requesting the Court’s Approval to Retain and Pay Houlihan Lokey
- 03.22.17 Letter On Behalf of the Receiver Seeking the Court’s Permission to Retain PricewaterhouseCoopers LLP
- 03.08.17 Order Authorizing Receiver to Provide DIP Financing for Northstar Offshore Group LLC.
- 03.08.17 Order on Consent Imposing Preliminary Injunction and Other Relief
- 03.03.17 Letter Requesting Entry of Proposed Order on Consent Imposing Preliminary Injunction
- 02.17.17 Letter in Response to the Receiver’s Request to Expend Funds
- 02.17.17 Letter Respectfully Requesting that this Court Issue an Order Authorizing the Receiver to Expend Funds
- 02.17.17 Exhibit: Proposed Order Authorizing Receiver to Provide DIP Financing for Northstar Offshore Group LLC.
- 02.16.17 Letter In Response to Orders of 02.14.2017 and 02.16.2017
- 01.31.17 Affidavit / Declaration in Support of Motion for More Definite Statement Application for Order Approving the Retention of Cooley LLP
- 01.31.17 Motion for Definite Statement Application for Order Approving the Retention of Cooley LLP.
- 01.31.17 Affidavit/ Declaration In Support for Motion for Definite Statement
- 01.31.17 Motion for More Definite Statement
- 01.30.17 Letter advising the Court of Recent Developments in Advance of the Order to Show Cause Hearing
- 01.27.17 Affidavit / Declaration in Support: Motion for Order to Show Cause filed by Bart Schwartz
- 01.26.17 Letter on behalf of the Receiver Bart Schwartz advising the Court of recent developments in advance of the Order to Show Cause hearing
- 01.24.17 Letter from Celia Goldwag Barenholtz on behalf of Bart Schwartz
- 01.24.17 Affidavit / Declaration in Support: Joint Motion for Order to Show Cause Reply Declaration of Receiver Bart M. Schwartz
- 01.24.17 Affidavit / Declaration in Support: Joint Motion for Order to Show Cause Declaration of Christopher D. Lindstrom
- 01.24.17 Reply in Support: Joint Motion for Order to Show Cause
- 01.19.17 Affidavit / Declaration in Opposition: Joint Motion for Order to Show Cause by Craig Smyser
- 01.19.17 Response in Opposition: Joint Motion for Order to Show Cause filed by Richard Schmidt
- 01.13.17 Affidavit / Declaration in Support: Consent Motion for More Definite Statement Motion for an Order Lifting the Litigation Stay
- 01.12.17 Consent Motion for More Definite Statement Motion for an Order Lifting the Litigation Stay
- 01.09.17 Memorandum in Support: Joint Motion for Order to Show Cause
- 01.09.17 Affidavit / Declaration in Support of Joint Motion for Order to Show Cause Declaration of Neal Jacobson
- 01.09.17 Affidavit / Declaration in Support of Joint Motion for Order to Show Cause
- 01.09.17 Joint Motion for Order to Show Cause by Bart Schwartz, United States Securities and Exchange Commission
- 12.19.16 Complaint
- 12.19.16 Notice
- 12.19.16 Order Appointing Receiver
- 12.19.16 Proposed Order to show cause, temp restraining order, order appointing receiver, and granting other relief
- 12.19.16 Proposed Order
- 12.19.16 SummonsJoint Motion for Order to Show Cause by Bart Schwartz, United States Securities and Exchange Commission
- 12.19.16 Minute Entry For Proceedings Held Before Magistrate Judge Lois Bloom – Arraignment as to Mark Nordlicht
- 12.19.16 Minute Entry For Proceedings Held Before Magistrate Judge Lois Bloom – Arraignment as to Joseph Sanfilippo
- 12.19.16 Minute Entry For Proceedings Held Before Magistrate Judge Lois Bloom – Arraignment as to Daniel Small
- 12.19.16 Minute Entry For Proceedings Held Before Chief Judge Dora Lizette Irizarry – Arraignment as to David Levy
- 12.19.16 Minute Entry For Proceedings Held Before Magistrate Judge Lois Bloom – Arraignment to Uri Landsman
- 12.19.16 Minute Entry for Proceedings Held Before Magistrate Judge Lois Bloom – Arraignment As To Joseph Mann
- 12.19.16 Order for Acceptance of Cash Bail
- 12.19.16 Arrest Warrant
- 12.14.16 Indictment
Adviser With Ties to Hedge Fund Platinum Put Client Funds in It
Beechwood Re didn’t inform investment clients of its ties to Platinum Partners, which is now under fraud investigation, when it put them in Platinum-related investments
Two years ago, Senior Health Insurance Co. of Pennsylvania hired an investment adviser that swiftly invested tens of millions of dollars of the insurer’s money with hedge-fund firm Platinum Partners and bought a series of hard-to-sell assets from Platinum’s funds.
What the insurer wasn’t told was that the adviser, Beechwood Re, was more than 40%-owned by family members of Platinum’s co-founders through trusts and by a former Platinum staffer, people familiar with the matter said.
Platinum now is under a federal fraud investigation, and Senior Health Insurance of Pennsylvania, known as SHIP, is working to get rid of many Platinum-related assets, SHIP’s chief executive says.
The CEO of Beechwood, Mark Feuer, said he didn’t tell SHIP and other clients about his firm’s ties to Platinum because the ownership stakes were passive and didn’t come with a management role. A Beechwood spokesman later said the firm “believes in the importance of all appropriate disclosures and at all times has acted in the best of interest of its clients.”
SHIP Chief Executive Brian Wegner said the insurer is investigating Beechwood’s investment procedures to determine their compliance with the firms’ investment agreement. A Beechwood spokesman said anyone with Platinum-related investments “should of course confirm that their interests are appropriately protected.”
As The Wall Street Journal reported in July, Platinum, which specializes in exotic investments such as loans to struggling companies, is being investigated by federal prosecutors in New York. One of its founders, Murray Huberfeld, has pleaded not guilty to conspiracy and wire fraud in connection with an alleged bribe of a union official for investments. Platinum has suspended redemptions from its hedge funds and announced plans to liquidate them. It has said it is cooperating with the investigation.
Platinum’s fund investors have been largely concentrated in a tight-knit group of observant Jewish businesspeople. Exposure to Platinum reached a far wider realm as a result of Beechwood’s having directed insurance-client money into Platinum funds and related investments.
SHIP’s Platinum-linked investments, which have included loans to Platinum itself, exceed the insurer’s shrinking $35 million capital surplus, or assets minus liabilities. A long-term-care insurer, SHIP counts on its investments to help cover the cost of benefits for elderly policyholders.
Both Beechwood and SHIP said investments are supported by independent ratings and backed by collateral. They said Beechwood, not SHIP, would bear the risk on them. SHIP said its capital levels will remain adequate.
Since early 2014, Beechwood has put more than $200 million of client money in Platinum-linked investments, according to public filings and people familiar with the matter.
Beechwood said all transactions related to Platinum since late 2014 have been “in the context of a restructuring away from Platinum,” a process “nearly complete.” It didn’t provide specific details of the restructuring.
Beechwood said in August that transactions with Platinum “represent under 10% of our well-capitalized $2.4 billion business and should be down to under 1% by the end of the year.”
Beechwood was founded in 2013 by two former Merrill Lynch operations executives, Mr. Feuer and Scott Taylor, partly to help insurers invest their cash.
Mr. Feuer had long known some at Platinum, whose executives were active in the same religious community on New York’s Long Island. He and Mr. Huberfeld served at a charity together, and Mr. Feuer’s sister went to the same school as Platinum co-founder Mark Nordlicht, according to people familiar with the matter.
For years, Platinum had little success attracting insurance-company money and considered starting a reinsurer to do so, people familiar with the situation said. It didn’t proceed, but after Messrs. Feuer and Taylor opened Beechwood Re, more than 40% of Beechwood’s equity was held by family-member trusts of Platinum’s founders as well as by a former Platinum employee.
That employee, David Levy, who is a nephew of Mr. Huberfeld, became Beechwood’s first chief investment officer. He later returned to Platinum. Then another Platinum employee became Beechwood’s second chief investment officer in 2015.
In other ties, Beechwood hired family members of Platinum’s owners, and it gave Mr. Huberfeld access to an office at its New York quarters in 2015.
Mr. Feuer said opening Beechwood was his and Mr. Taylor’s own idea, and the Platinum-linked owners were bought out this summer or earlier. He said Beechwood now is owned by himself, Mr. Taylor and an investor he wouldn’t name but who he said has no financial interest in Platinum.
Before family trusts of Mr. Huberfeld and Mr. Nordlicht were bought out, they were kept updated. Less than 10 minutes after Beechwood received word that money for its first transaction had arrived, Beechwood’s founders notified Messrs. Nordlicht and Huberfeld, documents reviewed by the Journal show.
A spokesman for Beechwood, David Goldin, said, “Everyone close to minority investors was notified at the same time.”
The initial Beechwood transaction, in February 2014, was a reinsurance deal with CNO Financial Group Inc. —an insurer from which SHIP was spun out—to manage about $500 million of long-term-care policies.
CNO audited $126 million of that total, it said in a filing last month, and believes “some or all of these assets may bear some connection to Platinum” or to parties with a link to Platinum.
CNO’s stock is down around 10% since then. Fitch Ratings placed CNO on a negative ratings watch, on the risk it could have to cover any Beechwood losses.
CNO declined to comment. Speaking for Beechwood, Mr. Goldin said, “We have no reason to believe there have been or will be any shortfalls in the reinsurance trusts.”
The Platinum-related investments Beechwood chose for clients came in several forms: investments in hedge funds, asset purchases from Platinum and loans to the firm or companies linked to it. One such company was Implant Sciences Corp. , an explosives-detection firm that trades as a penny stock.
In winning SHIP, the Pennsylvania insurer, as a client, Beechwood guaranteed a 5.85% annual return, a steep hurdle at a time of low interest rates.
Beechwood executives said many clients asked it to find investments that could achieve higher returns—one reason it chose Platinum-related investments. Another reason, said Mr. Feuer, was that Beechwood’s first chief investment officer, having come from Platinum, was familiar with its positions.
Mr. Goldin said Beechwood determines valuations for assets, and a third-party firm “separately provides an independent view.”
SHIP hasn’t marked down any of its Platinum-related investments, said its CEO, Mr. Wegner.
In the first quarter, after Platinum’s flagship fund said it wouldn’t immediately be able to meet redemption requests, filings show Beechwood directed about $8 million more of SHIP’s money into Platinum-related investments. In the second quarter, Beechwood directed that around $28 million of such investments be cashed out. Mr. Wegner said SHIP “was not aware of the liquidity issues faced by Platinum” at the time those moves were made.
SHIP, which has more than $2 billion of assets overall, had $57 million invested in or lent to Platinum hedge funds at the end of last year.
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Beechwood Re says exposure to hedge fund manager Platinum minimal
Aug 15 Reinsurer Beechwood Re said in a statement Monday that it was in the process of severing ties to Platinum Partners and that debt linked to the hedge fund manager and its holdings were small.
“There has been no apparent negative impact to these loans that represent a small portion of our portfolio; and we continue to be confident in the strong security, strict covenants and over-collateralization we have in place to protect against future potential downside risk,” Beechwood said.
Beechwood Re has been managing $590 million in assets for CNO Financial, which has come under pressure over Beechwood’s ties to Platinum.
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