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.

Following Platinum Partners – Links for Receivership

MELANIE L. CYGANOWSKI, RECEIVER c/o Otterbourg P.C. 230 Park Avenue, 30th Floor New York, NY 10169 E-mail: platinumreceiver@otterbourg.com Website: www.PlatinumReceivership.com

August 17, 2017

VIA WEB POSTING

Re:
Securities & Exchange Commission v. Platinum Management (NY) LLC, et al.
United States District Court for the Eastern District of New York
Case No.: 1:16-cv-06848-DLI-VMS

Dear Investors:

I am writing to you as the newly-appointed receiver of Platinum Credit Management, L.P.; Platinum Partners Credit Opportunities Master Fund LP; Platinum Partners Credit Opportunities Fund (TE) LLC; Platinum Partners Credit Opportunities Fund LLC; Platinum Partners Credit Opportunity Fund (BL) LLC; Platinum Liquid Opportunity Management (NY) LLC; and Platinum Partners Liquid Opportunity Fund (USA) L.P. (collectively, the “Receivership Entities” or “Platinum”) (collectively, “Platinum”). As Receiver, I am charged with, among other things, (i) taking control of and managing Platinum’s property and records (the “Receivership Assets”), (ii) taking actions as necessary and appropriate to preserve Receivership property, and (iii) taking actions as necessary and appropriate for the orderly liquidation of the Receivership Assets. The purpose of this letter is to advise you of the initial progress since my appointment and to explain how I intend to respond to your inquiries.

On June 23, 2017, the prior receiver, Bart M. Schwartz, resigned. As a result, by Order dated July 6, 2017, the Court appointed me as Receiver for the Receivership Entities. On July 21, 2017, the Court approved the retention of Otterbourg, P.C. as my legal counsel and Goldin Associates LLC as my financial advisor (collectively, the “Receivership Team”). Unless specifically modified, all previous court orders remain in place. A Second Amended Order Appointing Receiver, which sets forth the rights and responsibilities of the Receiver is expected to be entered in the near term. All documents, including a copy of the original Complaint for Injunctive and Other Relief against Platinum and its principals, Mark Nordlicht, David Levy, Daniel Small, Uri Landesman, Joseph Mann, Joseph Sanfilippo, and Jeffrey Shulse, filed by the Securities & Exchange Commission (“SEC”), Temporary Restraining Order, and Order Appointing Receiver can be viewed on this website.

Upon my appointment, the Receivership Team took immediate steps to secure and take control over Platinum’s accounts and books and records and implement cash management procedures. I also implemented procedures for the review and approval of all expenditures. The Receivership Team has prepared a 13-Week Cash Receipts and Disbursements Forecast, performed weekly actual vs. forecasted variance analyses, and is conducting daily and weekly reconciliations of Platinum’s cash and brokerage accounts.

The opening investment portfolio consisted of 90 investments in 69 entities. The assets of the Receivership Entities are diverse, but generally fall into three main asset categories: (i) life settlement investments (e.g., investments in life insurance policies), (ii) litigation finance investments, and (iii) “other” assets, which are primarily concentrated in the metals and mining and energy sectors, in companies that are mostly in the developmental stages. The nature of the Receivership Entities’ investments in the “other” assets varies. The Receivership Team is undertaking a thorough financial and legal analysis of the Receivership Entities’ position(s) in each investment, the rights of the Receivership Entity in the capital structure and pursuant to the operative documents, assessing the maintenance costs of the asset, and options available to the Receiver with respect to the monetization of the investment.

During the short time that I have been in control of the Receivership Assets, certain investments totaling approximately $8.6 million have been liquidated or are on the verge of liquidation. None of these assets has been liquidated in “fire sale” fashion. Indeed, one of them was monetized at par value. I believe that the life settlement and certain of the litigation finance investments are liquid and that there may be additional funds realized from their liquidation in the next several months.

As a general matter, however, I have not found support for the values reflected on Platinum’s books or for certain early indications of value in the Receivership. I look forward to working with Houlihan Lokey Financial Advisors, Inc., which I have retained to provide valuation services, and developing supportable valuation assessments.

I will report on our efforts by filing periodic reports with the Court. The reports will also be posted to this website set forth above. The most recent report: My Initial Status Report to the Court, which was filed on August 10, 2017, provides a more detailed review of the actions taken since my appointment and can be found on this website.

You can send general email inquiries to platinumreceiver@otterbourg.com. Although my staff and I will review all emails we receive, it is not practical for us to respond personally to all messages, not least because it would consume a significant amount of time. Accordingly, we will update the Frequently Asked Questions (“FAQ”)section on this website as needed to reflect your inquiries and our responses.

Thank you in advance for your cooperation and understanding.

Sincerely,

Melanie L. Cyganowski
Receiver

Case Information

RECEIVERSHIP ENTITIES
Platinum Credit Management, L.P.
Platinum Partners Credit Opportunities Master Fund LP
Platinum Partners Credit Opportunities Fund (TE) LLC
Platinum Partners Credit Opportunities Fund LLC
Platinum Partners Credit Opportunity Fund (BL) LLC
Platinum Liquid Opportunity Management (NY) LLC
Platinum Partners Liquid Opportunity Fund (USA) L.P.

CASE NUMBER
1:16-cv-6848 (DLI)(VMS)

COURT
United States District Court for the Eastern District of New York

JUDGE
Chief Judge Dora Lizette Irizarry

DATE FILED
December 19, 2016

LEGAL COUNSEL TO RECEIVER
Otterbourg P.C.
230 Park Avenue
New York, NY 10169
Phone: 212-661-9100
Fax: 212-682-6104
Attention: Adam C. Silverstein
Erik B. Weinick

FINANCIAL ADVISOR TO RECEIVER
Goldin Associates LLC
350 Fifth Avenue
The Empire State Building
New York, NY 10118
Phone: 212.593.2255
Fax: 212.888.2841
Attention: Marc Kirschner
William Edwards

RELATED CASES
1:16-cr-00640-DLI USA v. Nordlicht et al
1:16-cr-00640-DLI-1 Mark Nordlicht
1:16-cr-00640-DLI-2 David Levy
1:16-cr-00640-DLI-3 Uri Landesman
1:16-cr-00640-DLI-4 Joseph Sanfilippo
1:16-cr-00640-DLI-5 Joseph Mann
1:16-cr-00640-DLI-6 Daniel Small
1:16-cr-00640-DLI-7 Jeffrey Shulse

Docket Items for the above cases can be located at the PACER portal for the Eastern District of New York, located here.

A Platinum Collection of Indictments -Who Said We Were Wrong???

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.

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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.

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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)