The Alter Egos of Platinum Partners – “In Pari Delicto” [LAW360]

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.

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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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A Platinum Receiver – The Filings so Far and the Connections to be Made

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

Platinum and Beachwood and Murray…




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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