As the readers of this blog may remember, the Platinum Partners fraud was widely covered in and around 2016 and 2017. The coverage included years of research on the part of a small group of very dedicated people who collaboratively amassed a treasure trove of information regarding the Platinum Partners hedge fund, its activities, the defrauding of millions of dollars in investor money, bribery, securities fraud and the list goes on.
We attended hearings on the frauds related to Black Elk Energy in 2019 and, by all estimation and analyses, we had the partners dead-to-rights on, at the very least, the securities fraud. And then, in what we believed to be a shocking turn of events, Judge Cogan, an altogether brilliant member of the legal community, overturned a jury verdict and acquitted one of the partners and granted the other a new trial. Overturning a jury verdict is unusual. Acquitting a convicted man made our heads turn.
The Black Elk Energy deal, while complicated and nuanced, represented a clever, if not unimaginably creative manipulation of the rights of the unsecured bondholders against the secured bondholders, allowing the Platinum Partners (unsecured bondholders) to divest Black Elk of Millions and Millions of Dollars in valuable oil assets, thereby leaving the secured investors (those same voting shareholders) with nothing. You see, once the secured property is filtered out of any company, the secured holders of debt and financial obligations are left with nothing to secure. This can, if properly directed, reduce the secured bondholders to a position below the unsecured bondholders who, in the ordinary course, would have been paid out first. However, such a vote would have required the Platinum Partners responsible for that vote to have sat down and affirmatively orchestrated such a corporate action. This could not have lacked criminal intent, particularly when David Levy (who was acquitted on those grounds) was and continues to be, one of the largest beneficiaries of the Black Elk deal.
Taking a step back in time, the takeover of control of Black Elk, which began in 2007 when Platinum began investing in the Black Elk Energy company, was a corporate move that legends are made of, a slight of hand and a measure of serendipity. The slow bleed of that company of its assets and value, by the very partners who were supposed to be acting in the best interest of the company did not go unnoticed, at least by us. It was carefully orchestrated and it had a measure of well-honed finesse.
In simple terms convincing secured shareholders to vote on a measure which was framed to them as a vote in the best interest of the company, and ultimately paved the way for the Platinum Partners to drain assets, followed a pattern and practice of corporate behavior by Platinum’s Partners, at least for anyone keeping tabs of their activities.
And yet, at the end of it all Judge Cogan ruled that David Levy lacked criminal intent and Mark Nordlicht was entitled to a new trial. Sadly, we were left bereft by the miscarriage of justice. What occurred in the years leading up to that trial was more than criminally intentional, it was very dark. What has transpired since, is astounding.
The Partners have not starved, as one would think when a company goes from having $1.7 Billions of Assets under Management to nothing (at least nothing being reported). At the end of the day, the greatest beneficiaries of that vote, were the Platinum Partners, and despite contentions to the contrary, these men got very rich off their crimes.
On Thursday, November 5, 2021, a three panel U.S. Appeals Court, after 9 weeks of testimony, unanimously restored the convictions of Mark Nordlicht and David Levy. In a 102-page decision, they determined that the evidence supported the conviction of Mark Nordlicht and did not support a finding of David Levy’s lacking “criminal intent.”
A little vindication goes a long way. Murray Huberfeld’s dramatically reduced sentence remains a slap in the face for his victims in the Platinum Partners fraud. Hopefully David Levy and Mark Nordlicht and their high-priced legal team will not succeed in convincing a judge that they deserve a reduced sentence. They unequivocally do not.
See below for additional reading and a copy of he decision.
NEW YORK, Nov 5 (Reuters) – A U.S. appeals court on Friday restored the fraud convictions of two former top executives at the now-defunct Platinum Partners hedge fund, saying a trial judge erred in acquitting one defendant and granting the other a new trial.
In a 102-page decision, the 2nd U.S. Circuit Court of Appeals in Manhattan said sufficient evidence supported the July 2019 jury convictions of Platinum co-founder Mark Nordlicht and co-chief investment officer David Levy.
The appeals court returned the case to U.S. District Judge Brian Cogan in Brooklyn for sentencing. Platinum was based in Manhattan and once had about $1.7 billion of assets.
Hedge fund founder Mark Nordlicht and co-chief investment officer David Levy were convicted in 2019 of securities fraud and other charges
Mark Nordlicht, the founder of defunct hedge fund Platinum Partners, leaving federal court in the Brooklyn borough of New York in 2019.
The U.S. attorney’s office for the Eastern District of New York, which prosecuted the case, appealed that decision.
In Friday’s ruling, U.S. Circuit Judge Robert Sack wrote that there had been sufficient evidence for a rational jury to convict the defendants, and neither an acquittal or new trial was warranted.
“It is accordingly only in exceptional circumstances, where there is ‘a real concern that an innocent person may have been convicted,’ that a court ‘may intrude upon the jury function of credibility assessment’ and grant a [motion for a new trial],” he wrote, quoting from another case.
Lawyers for Messrs. Nordlicht and Levy didn’t respond to requests for comment. A spokesman for the U.S. attorney’s office declined to comment.
The Decision decided on November 5, 2021 by the 3 Member Appellate Panel
An SEC receiver appointed to preserve assets of the defunct Platinum Partners funds claims that the manager, Mark Nordlicht, of New Rochelle, owes the funds $220 million.
Melanie L. Cyganowski sued Nordlicht Dec. 7 in U.S. Bankruptcy Court, White Plains, to stop him from using bankruptcy to get out of paying back creditors.
Nordlicht omitted information and made false statements in bankruptcy documents, the complaint states, as “part of a fraudulent scheme by the debtor to conceal estate assets from the Chapter 7 trustee and his creditors.”
Nordlicht’s bankruptcy attorneys did not respond to a message asking for their client’s side of the story.
Nordlicht co-founded Platinum Partners in 2003, and at one point managed $1.7 billion in assets. But by 2016, the funds were nearly insolvent.
The federal prosecutor in Brooklyn indicted him for securities fraud and the U.S. Securities and Exchange Commission filed civil charges. Both cases are pending.
Cyganowski was appointed to marshal assets of several Platinum funds, on behalf of the SEC.
This past June, Nordlicht petitioned for Chapter 7 liquidation, declaring assets of $137,052 and liabilities of more than $206 million.
But according to the Cyganowski complaint, Nordlicht should not be allowed to use bankruptcy to discharge debt because he engaged in a “long-running pattern of fraudulent conduct, by filing false schedules, lying under oath and knowingly deceiving the Chapter 7 trustee.”
A bankruptcy schedule, for instance, shows that Nordlicht and his wife, Dahlia Kalter, receive $25,000 a month from his mother for tuition and other expenses. But Nordlicht’s mother actually wrote them one check, according to the complaint, for $1.4 million.
Nordlicht allegedly did not disclose ownership of a luxury condominium on Manhattan’s Upper West Side or the use of shell companies to conceal assets, as “part of a larger scheme to frustrate a recovery by his creditors in this bankruptcy.”
Cyganowski links the alleged bankruptcy misinformation to Nordlicht’s management of the Platinum funds.
THE PLATINUM PARTNERS’ CONVICTION AND A VERDICT THAT, IF OVERTURNED, WILL ALLOW WHITE-COLLAR CRIME TO RUN RAMPANT…
Dear Readers:
We cannot overstate the importance of the verdict in the Platinum Partners’ case. The complexities involved in the scams perpetrated on investors, as well as the historical practice of the Defendants can also not be overstated. We followed Platinum for years. There was more than enough evidence to obtain a conviction. Those convictions should stand.
But then, there’s a master orator and talented attorney… Jose Baez.
Jose Baez, whose talent as a show-man, a skilled craftsman and an artist within a legal defense career, can only be admired by those of us who don’t have that type of skill. In a creative and theatrical cinematic courtroom performance, Baez likened the Platinum Partners scheme to a “run on the bank” of the It’s a Wonderful Life variety. He made a direct analogy between George Bailey and the Defendants, trying to place them in the same heroic conundrum of Bailey. What a way to ruin a great Jimmy Stewart movie.
The major problem with that analogy is that George Bailey did not defraud people out of money. To the contrary, he was prepared to go to jail if the envelope of money was not found. He was prepared to be accountable to the bank’s clients. The Platinum Partners’ funds did not misplace the money in an envelope. There were no absent-minded employees. Platinum Partners’ assets were intentionally, carefully, and craftily transferred to the benefit of the same partners in other funds. Platinum’s Partners could not meet redemptions because the entire movement of assets by the fund was one scheme after another, a series of misrepresentations and untruths told to investors. There is no correlation. If anything, the closest comparison to any character fromIt’s a Wonderful Life is one that makes an analogy between Mark Nordlicht and Mr. Potter, the story’s antagonist who refused to lend Bailey money and wanted to close the bank and destroy the Bailey family.
Unlike the It’s a Wonderful Life story, Platinum Partners were not protagonists, kind decent people who made a terrible and hapless error. To turn Mark Nordlicht into George Bailey is like turning John and Timothy Rigas into the Bailey Brothers or, Anna Gristina into a virgin. Just not happening…
One of the problems with having lost total anonymity (see here) is the second hat worn by the blogger, that of an attorney. Unfortunately of late, attorneys have been suspended for criticizing judges. Whistle blowers are now at risk for their lives from the rulerof what used to be the free world; and the moral compass of the judicial system in the US seems to have turned on its axis. Being a nameless and faceless spokesperson for truth or some form of justice is risky; but putting a face to that is like removing a Kevlar vest.
Anonymity provided protection, not by allowing us to type words we otherwise would not have typed, but by affording us with a voice without the weights and burdens of multiple degrees and professional demands and what could appear to be attorney advertising were it to have a face. Our voice spoke words of a faceless anybody who did the research and came to a set of conclusions. We no longer have that level of protection. So we tread lightly, a chilling of speech in full force and effect. And for the sake of attorney ethics, perhaps call this attorney advertising, perhaps not. View it as you will.
And we digress. The ruling below by Judge Brian Cogan feels nothing short of a betrayal of justice for the victims, for justice and for the entire financial system. The jury had it right despite the theatrics of truly gifted attorneys representing the defendants. The attorneys did their jobs and the jury ruled, even at the many legal and judicial disadvantages imposed by Judge Cogan. And then the judge overruled.
We don’t get it. It feels very wrong.
The jury was an unsophisticated jury with likely precious little by way of experience in the investment world. And yet they were convinced that there was enough evidence to convict Mark Nordlicht and David Levy. We were disappointed they missed the whole picture but they got a piece of it right.
Unfortunately the Prosecution team did a rather inadequate job of breaking up the entire fraud piece by precious piece; and missed so many crucial bits of evidence to put before the jury, not the least of which was a comparison to how the global markets were performing at the time the Platinum Partners were active. This comparison shed light on how lacking in transparency were the activities of Platinum Partners now Teflon Partners at the time.
It was all very complicated; but could have been broken down by someone with enough experience in investments to break it all down. Yet the jury got the significance of Black Elk, a feat of epic proportions.
We have years of research behind our stories on this subject, a lifetime in the hedge fund world and extensive knowledge of the subject matter. The lawyers representing the State were out-played by master craftsmen. Simple.
But the jury got it right.
To be undone by the judge came as a surprise, accompanied by a deep sense of sadness and a feeling of despair for everything just and true about our judicial system, if such truth exists, and our financial markets. The markets work because of the integrity of the investment vehicles, the rules the hedge fund managers MUST play by. Teflon/Platinum Partners did not play by those rules. It all only works in concert when the investors can count on the judicial system to ensure act as referees or alternatively dole out equitable and judicial remedies when all else has failed. In this case, the justice system was in discord, as we see it.
The world’s financial markets continue to function only when investors can trust the underlying materials about the risks, solely when investors understand the thickness of the ice they are going to be skating on, which is supposed to be transparently laid out. There can be no substrata of lies and deceit or the entire endeavor is accompanied by hidden risks. That was the Teflon/Platinum Partners strategy. They hid risks, the ice was thinner in places.
This case, if not for any other in our anonymous and not-so-anonymous viewpoint, is representative of an entirely broken system. If risks can be so well hidden that minutiae determine a Judge’s unilateral decision to overturn a verdict, no market is safe.
The jury understood the material and afforded us with a just result. The judge here we simply do not understand.
Hopefully the prosecution team will retry this case; and perhaps they will contact those with an abundance of knowledge on the materials for assistance. If they decide not to retry the case, the victims will have been re-victimized by the very system designed to protect them.
If the Prosecution does not retry this case it will only either serve to substantiate a belief in unequal justice for the wealthy or prove that the Securities Acts and the investor laws are meaningless or some combination of the two. The Jury got it right. One of those convicted has been acquitted by Judge Cogan. Game well played.
We implore upon the Prosecution to take up the case again and to do better.
In a rare move, U.S. District Judge Brian Cogan (Eastern District of New York) overturned a jury’s conviction. Cogan acquitted David Levy and granted a new trial for Mark Nordlicht. Levy and Nordlicht, both executives at now defunct hedge fund Platinum Partners, were convicted of securities fraud, conspiracy to commit securities fraud, and conspiracy to commit wire fraud in July of this year after a 9-week trial. A third defendant, former Chief Financial Officer Joseph SanFilippo, was cleared of all charges.
Back on December 14, 2016, seven individuals were indicted for their alleged participation in transactions at Platinum Partners, which was founded in 2003. Two of the primary targets of the investigation were Nordlicht, one of Platinum’s founder partners and its Chief Investment Officer, and David Levy, a senior executive at Platinum who also served as co-portfolio manager for Black Elk, an oil and gas company that Platinum controlled from August 2010 through September 2015.
As the trial approached, Nordlicht made a change in counsel from high powered attorneys at Quinn Emanuel Urquhart & Sullivan LLP to Jose Baez who gained notoriety when he won “not-guilty’ decisions in two separate high profile murder cases defending Casey Anthony (Florida) and former New England Patriot tight end Aaron Hernandez. It was an interesting strategy and one that seems to have paid off for now.
There is no doubt that there was some great lawyering here, but the case is also interesting because it went from some slam dunk Ponzi scheme, to a real hedge, who had some exotic investments, that went out of business after the FBI raided the place. So was it the hedge fund that was a fraud or an FBI raid that caused the fund to shut down? One thing is clear, there was a raid.
Platinum managed multiple funds, including Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”), Platinum Partners Credit Opportunities Master Fund, L.P. (“PPCO”), and Platinum Partners Liquid Opportunity Master Fund L.P. (“PPLO”). One transaction involved the valuation of one of the funds’ investments, Black Elk – an oil and gas company that Platinum controlled from August 2010 through September 2015, and the subsequent sale.
Government prosecutors claimed that Nordlicht and Levy hatched a plan to get the money from Black Elk’s sale through misrepresentations to bondholders. The Government claimed that the evidence would show that the defendants rigged the Black Elk bond consent solicitation. At trial, the jury found Nordlicht and Levy guilty on counts six to eight (related to the Black Elk) but not guilty on counts one to five, which related to Platinum.
After a 9-week trial and the partial guilty verdict, Nordlicht and Levy moved for a judgment of acquittal under Federal Rule of Criminal Procedure 29 and for a new trial under Federal Rule of Criminal Procedure 33. Judge Cogan deferred ruling on these motions until Nordlicht, Levy, and the government prosecutors fully briefed their respective positions. So just when prosecutors thought the trial was over, it wasn’t. After hearing arguments from both sides, Judge Cogan acquitted Levy and stated that Nordlicht’s motion for acquittal was denied, but a new trial was approved as prosecutors did not provide enough evidence to sustain the conviction.
Judge Cogan wrote;
“In considering whether to grant a new trial, a district court may itself weigh the evidence and the credibility of witnesses, but in doing so, it must be careful not to usurp the role of the jury .. The ultimate test is whether letting a guilty verdict stand would be a manifest injustice. … There must be a real concern that an innocent person may have been convicted.”
Although the Government adduced sufficient evidence for a judgment of acquittal to be unwarranted, letting the verdict stand against Nordlicht would be a manifest injustice. Thus, Nordlicht’s motion for a new trial is granted.
It was a complex case but Platinum was a complex hedge fund, something any jury would struggle with. It all started with an FBI raid, allegations that Nordlicht was seeking to flee the country and that the hedge fund was a Ponzi scheme. It turns out that the FBI’s raid was successful in taking down the Platinum but there was no clear motivation as to the defendants when they began to experience a liquidity crisis at Platinum (a real issue but not necessarily criminal). It’s not against the law to make bad decisions or to lose money … something that seems to have been criminalized in this case.
Mark Nordlicht, the founder of defunct hedge fund firm Platinum Partners, was found guilty on Tuesday of defrauding bondholders of an oil exploration company Platinum controlled, but cleared of charges he defrauded investors in Platinum’s hedge funds….
The three men were accused of lying to investors about the health and liquidity of the flagship Platinum Partners Value Arbitrage fund. Prosecutors said Platinum operated “like a Ponzi scheme” by using new money to fund redemptions by earlier investors, a practice referred to internally as “Hail Mary time.”
The jury, however, rejected those charges, finding all three men not guilty.
This is a truly shocking outcome, given the alleged bribe and all of that missing money and all of the things the Platinum execs did to avoid facing the music, from the aforementioned alleged witness intimidation to the alleged plan to spend the rest of their days safe from extradition in Israel, and also how relatively easy it is to win convictions on these sorts of things. And it could get yet more shocking still.
After the jury left, lawyers for Nordlicht and Levy moved to overturn the guilty verdicts. U.S. District Judge Brian Cogan ordered them to file papers in support of their motions and said he might hold a hearing to consider them.
Platinum is a valuable precious metal, but it’s actually difficult to distinguish it from other materials, such as white gold and silver, by simply looking at them. However, platinum is harder to dent, not as soft as gold or silver, and weighs more than each of them. There is no bargain for platinum, either. With common sense and little knowledge, you can avoid buying fool’s platinum.
Platinum Partners is a New York-based hedge fund manager with more than a billion dollar assets under management — only a few people have heard of them and even fewer people enjoyed their stellar returns. Over the last 13 years of operations, its flagship Platinum Value Arbitrage fund generated 17% annualized return without having any negative year. However, Platinum Partners’ track record was nothing but fool’s platinum.
Case Profile:
Background
For years, a little-known New York hedge fund called Platinum Partners stood out for its stellar double-digit investment returns. Platinum Partners Value Arbitrage Fund, Platinum Partners’ flagship fund, generated 650%, or 17% p.a., over the 13 years since inception with only three months of greater than 2% loss. In sum, there was something uncomfortably consistent about their performance. It turned out that those returns were nothing but ‘fool’s platinum’.
Mark Nordlicht (CIO) and Murray Huberfeld (President) co-founded Platinum Partners in 2001 and launched their flagship fund, Platinum Partners Value Arbitrage Fund (“PPVA”), in 2003. Their impeccable performance attracted money from investors and their assets under management stood $1.7 billion as of 2015, according to Platinum Partners’ last SEC filing. PPVA claimed a multistrategy investment approach which sought to generate consistent returns through several uncorrelated sub-strategies. According to the interview with Uri Landesmann in 2011, PPVA invested across seven strategies: Long Short Fundamental, Quantitative, Opportunistic/Macro, Energy Related Arbitrage, Asia Based Arbitrage, Event Driven and Asset Based Finance (Energy, General and Mining). In particular, the PPVA fund changed allocations among strategies dynamically over time based on the opportunity sets created by inefficiencies. The largest targeted allocation of the portfolio was Asset Based Finance, which represented 43% of PPVA’s net asset value.
Source: Risk.net
Nordlicht, 48, is a second-generation commodities-options trader. He started his career as a trader in the pits of the New York Cotton Exchange. In 1991, he founded Northern Lights Trading, a proprietary options firm based in New York. From 1997 to 2001, partially overlapping his time at Northern Lights, he was a founder and the managing partner of West End Capital, a New York-based money management firm that specialized in privately negotiated structured debt financing for small and mid-cap publicly traded companies. He also served as the Chairman and Director of Optionable Inc. from 2000 to 2007. Nordlicht earned a B.A. in Philosophy from Yeshiva University.
Huberfeld, the 55-year old son of a kosher restaurant owner in Brooklyn, traded penny stocks, and had a long history of legal troubles since 1992 according to court filings. Huberfeld took more of a back-seat role in the fund — connecting friends and community acquaintances, but was not the public face of the company.
In 2003, Huberfeld, David Bodner and their other friends helped Nordlicht to start Platinum Partners with $25 mm. Two years later, Huberfeld also started his own hedge fund called Centurion, whose name was later changed to Platinum Partners Credit Opportunities Master Fund.
Platinum Partners’ success made Nordlicht himself rich. According to the Form ADV filing with SEC, 23% of Platinum Partners’ total gross asset value, or $382 mm, belonged to the firm’s principals, majority of which was Nordlicht’s. Additionally, the most recent Department of Justice complaint against Platinum alleged that Platinum’s management had reaped over “$100 mm in fees alone” between 2011 to 2016 — the period in which the bulk of Platinum’s legal troubles stem from.
Source: SEC Form ADV
Problems
In June 2016, Huberfeld was arrested on charges of conspiracy and wire fraud. Prosecutors alleged he had bribed Norman Seabrook, the portfolio manager for a pension fund of a New York City correction officers’ union, with $60,000 — delivered “in a Salvatore Ferragamo bag” — in exchange for a $20 million investment in Platinum Partners’ hedge fund. Both Huberfeld and Seabrook pleaded not guilty to the scam, but in December, federal agents arrested Nordlicht and six others on counts related to a $1 billion “ponzi-like” scheme that started with over-inflating private assets, covering losses and eventually, covering redemptions with new inflows.
In particular, Platinum relied on capital from a network of wealthy Orthodox Jewish investors — including the Gindi family, owners of the Century 21 department-store chain, and real estate moguls Ruby Schron and Abraham Fruchthandler. As such, the collapse of Platinum Partners was a shock to the wealthy Jewish community in New York and Florida, which has not completely recovered from the damages stemming from the Madoff scandal less than a decade ago.
The problems of Platinum Partners emerged as early as 2012. On November 6th of that year in an email entitled “Current Redemptions Nov 5, 2012” regarding a $27 mm redemption, Nordlicht had stated that “If we don’t exceed this in subs from dec 1 and jan 1 we are probably going to have to put black elk in side pocket. i also need to pay back [loan from an individual] and an additional 4 million oct 31 and nov 30 so we are talking 40”. Replying, President of Platinum Uri Landesman said “we could sweep the table here, so far, think jan 1st is a possible for some, if not all”. In response, Nordlicht writes “it’s just very daunting. It seems like we make some progress and then reds are relentless almost. It’s tough to get ahead in subs if u have to replace 150–200 a year”. Landesman ended the email chain expressing “Didn’t take it as complaining, it is my job. Redemptions very daunting”.
Later on April 29,2014, Nordlicht sent an email to CFO Joseph SanFilippo stating: “Start paying down reds [redemptions] as u can. Between Blake and ppbe (additional 10million), should have decent short term infusion. Hopefully some may 1 subs [subscriptions] show up as well. Have a few more outflows to discuss but this is obviously the priority.” Things seemed to reach a crisis point in June 2014 when Nordlicht wrote “It can’t go on like this or practically we will need to wind down….this is code red,” Yet investors remained in the dark about the firm’s precarious liquidity position — even as the firm claimed quarterly liquidity with 90% of capital being able to be returned “in the first 30 days”. A month later, when an investor emailed to ask about the reliability of Platinum’s reported performance figures, Landesman wrote back, “The numbers are all kosher, they have had verbal input every month.”
A June 3, 2014 email from a Platinum employee to Nordlicht and others entitled “Cash Sheet” listed cash on hand of $96,000; “Pending Inflows” totaling $20,000,000; “Pending Outflows” totaling $16.75 mm and Redemptions of $500,000 for May and $9.5 mm for June, which thus resulted in a “Projected Cash” of negative $6.14 mm. Nordlicht forwarded this message to another staff member asking him to: “Take June reds off the list,” inferring that Platinum was unable to meet its June redemptions of $9.5 mm.
Platinum Partners’ hunt for cash eventually led to Norman Seabrook. Seabrook was a Portfolio Manager for the pension fund of the Correction Officers’ Benevolent Association (“COBA”), the largest NYC corrections officers’ union. Seabrook was noted in filings to be “frustrated with working hard to invest the pension money and receiving no reward”. In late December 2013, Platinum Partners formerly arranged for a meeting between New York’s Correction Officers’ Benevolent Association (COBA) and Platinum Partners. By January 2014, Seabrook was able to convince his Annuity Fund Board to invest in Platinum Partners. The first investment was made in March 2014 when COBA made an initial $10 mm subscription. In June another $5 mm was added. In return, Seabrook ended up taking $60,000 in payment. A further $10,000 was donated to charity Seabrook was involved and was honored at.
Platinum Partners was involved with several suspicious transactions, which probably caused significant losses over the history of the firm. However, the biggest problem was the mismatch of liquidity and the lack of oversight for independent valuation of assets. While Platinum Partners promised investors that they could redeem their investments every month with 60 or 90 days’ notice and receive payment of 90% of their redemption request within 30 days thereafter, they started investing a significant amount of assets in illiquid investments — namely Asset Based Finance. As discussed previously, almost 43% of the PPVA’s portfolio was invested in this illiquid investment opportunities. The most notable illiquid investments were (1) Golden Gate Oil LLC, valued at around $170 mm, or 19% of PPVA’s total assets at the end of 2013, and (2) Black Elk Energy Offshore Operations LLC, representing 24% of PPVA’s total assets at the end of 2012. These two assets represented at least 20–30% of the portfolio between 2012 and 2014. At the end of 2014, almost 80% of fund assets at the end of 2014 was classified as “Level 3” assets. In late November 2015, Platinum Partners placed a majority of PPVA’s assets, all highly illiquid, in a “side pocket”, from which no redemptions were possible for three years.
PPVA’s Estimated Exposures to Golden Gate and Black Elk
Source: SEC v. Platinum Management (NY) LLC, et al
In addition to these two investments, Platinum Partners most likely experienced significant losses from exotic investments in so-called life insurance settlements, medical receivable financing and litigation financing. This is not completely confirmed as there is no overwhelmingly clear evidence in the public domain
Life insurance settlement: BDL Group, subsidiary of Platinum Partners was accused by SEC in 2014 for collecting personal information of terminally ill patients to benefit from investing in variable annuities. BDL raised approximately $56 mm for the scheme. It is not clear whether Platinum Partners lost money from this investment.
Medical receivable financing: Platinum Partners was reported as a victim of $287 million medical receivable financing Ponzi scheme orchestrated by Robert Feldman and Douglas Kuber in Florida. The scheme was operated from 2008 to 2010. The total amount of losses is not disclosed.
Litigation financing: Platinum Partners participated in Scott Rothstein’s $1.2 billion litigation financing Ponzi scheme through Banyon Capital, which essentially functioned as the scheme’s feeder fund. It is reported that Platinum Partners’ transactions totaled more than $400 mm. At the cost of other investors, Platinum Partners recovered some assets before the scheme collapsed, but eventually settled to pay $32 mm to the bankruptcy estate. The total amount of losses is not disclosed.
Platinum Partners increased its valuation of Golden Gate sharply while in actuality, the company’s performance was falling far below initial projections, with deeply disappointing oil production figures and heavy operating losses. On a process level, the company’s first development stage involved the drilling of seven wells, but such efforts bore heavy cost overruns and led the firm to consume the $18 million borrowed from Platinum Partners by the end of 2013. Golden Gate also faced heavy delays in obtaining needed permits — worsening problems further. Moreover, of the wells that were producing, such produced mostly water and many were shut down. The only consistently-producing well provided revenue representing less than 10% of initial projections. Resultantly, far from producing projected millions, Golden Gate netted $6 million losses in 2013.
Platinum Partners even tried to have Black Elk to purchase their stake in Golden Gate, but this potential transaction created a problem as Black Elk’s engineers who appraised Golden Gate’s oil reserves said preliminary estimates of Golden Gate’s reserve was merely 10% of Platinum’s prior valuation. In Sep 2014, Platinum Partners paid $3.2 million for the remaining 52% stake in the company and valued the entire stake in the company at $140 million. This transaction instantly generated $134 million paper profit, or a 16% return (in 2014, PPVA was up 10%).
Valuation of Golden Gate
Source: SEC v. Platinum Management (NY) LLC, et al
The relationship between Platinum Partners and Black Elk was even murkier and complicated, but Platinum Partners essentially controlled Black Elk and used it to manage its liquidity and inflated asset values. While holding substantial amount in Black Elk-related assets, Platinum Partners unlawfully extracted nearly $100 million out of Black Elk after Back Elk sold some of its core assets.
So murky was the relationship that a separate law-suit, a civil one, is also underway between third-party Black Elk bondholders and Platinum Partners. In this, creditors accuse Platinum Partners of using a “Trojan Horse” associated entity to bypass fair treatment of bondholder rules (that excuses Platinum from voting as a bondholder) to save Platinum’s preferred shares positioning and subordinate more senior, secured debt.
***
Formed in November 2007 as a limited liability company, Black Elk was an oil and gas company headquartered in Houston with all its producing assets located offshore in US federal, Louisiana and Texas state waters in the Gulf of Mexico. John Hoffman was Black Elk’s founder and CEO.
In 2009, Platinum invested in Black Elk across the capital structure through Series E Preferred shares, vote holding equity rights, and secured notes.
That investment initially seemed successful. In 2011, the Wall Street Journal reported that, helped in part by the ban on drilling in the Gulf of Mexico after the BP Macondo explosion and oil spill, Platinum’s Black Elk investment “was Platinum’s most successful last year, having contributed a significant portion of its high-teens return.”
From 2008 to 2011, Black Elk employed a buy-and-build strategy to develop its business.
To finance this, Black Elk issued $150 mm of senior secured notes on November 23, 2010. Simultaneously, the company entered into a Security Agreement in favor of The Bank of New York Mellon Trust Company, N.A. (“BNY”) as Trustee and Collateral Agent for the 13.75% Coupon Senior Secured Notes. Pursuant to such an agreement, the Senior Secured Noteholders were granted a first priority lien on substantially all of Black Elk’s assets.
At its peak of operations, Black Elk had approximately 457,065 gross (223,852 net) acres under lease in the Gulf of Mexico, 935 gross (444 net) wells and 58 production platforms.
PPVA was Black Elk’s principal lender and considered its position as one of its most profitable. At the end of 2012, Black Elk represented 24% of PPVA’s total assets. However, On November 16, 2012, though, an explosion occurred on an offshore Black Elk platform — killing three workers. The explosion caused huge legal headaches, which eventually led to spiraling legal costs, and suspensions of operations.
Black Elk was effectively insolvent by early 2014 — some trade creditors were paid, if at all, more than a year past their due dates.
Also by early 2014, Nordlicht and his associates dominated Black Elk’s management as its majority largest investor. The firm controlled its credit facility, controlling the majority of the Senior Secured Notes and also junior Series E preferred equity, and appointing and controlling the Black Elk Board and CFO. In early 2014, Platinum confronted the prospect of losing more than $100 mm if the company could not meet its debt schedule. In response, Platinum Partners looked towards selling of Black Elk’s assets and returning to the proceeds to itself, and not its senior noteholders.
This came about through the sale of Black Elk’s prime assets to Renaissance Offshore, LLC. Proceeds from that sale was to Platinum by redeeming its junior Series E preferred equity instead of the Senior Secured Notes, including those held by Platinum, which were in fact entitled to first call on those proceeds.
Thus, as Black Elk negotiated the sale of its prime assets to Renaissance, Platinum devised a method to seek noteholder approval to waive their rights to the sale through an amendment to the indenture. Understanding that it would be difficult to persuade truly unaffiliated and disinterested Secured Senior Note Holders to renounce their rights and that Platinum itself as an equity holder of Black Elk could not use its noteholder votes, Platinum had to find a way to rig the vote.
Taking into account Platinum’s ownership of most of the $150 mm in notes, $37 mm of said notes comprised a majority needed to waive the rights of the indenture.
As Platinum controlled Black Elk, this statement meant that the sum of all Notes held by Platinum, Platinum-affiliated entities and entities controlled by Platinum were to be subtracted from the $150 million Notes entitled to vote. Of the remainder, a majority had to consent.
Since it was blatantly obvious that truly unaffiliated and disinterested Senior Secured Note Holders would consent to writing-off their secured notes, Platinum this created a Trojan horse “friendly” consenter: secure the votes of a company or companies holding a substantial number of Notes that looked independent, but were in fact controlled by Platinum.
The ‘Trojan Horse’ was a group of Beechwood entities named in filings as B Asset Manager Fund and B Asset Manager Fund II. In addition to 68.9% ownership, Platinum assigned a number of Platinum employees to Beechwood, and installled a Platinum executive, David Levy, as the Chief Investment Officer of B Asset Manager. Levy still continued to use his Platinum Partners email address while “CIO” of Beachwood. Levy soon thereafter directed the Beechwood entities in early 2014 to purchase $37 mm of the Black Elk Senior Secured Notes. The Beachwood entities thus then voted to consent their Notes in favor of the Platinum proposal.
Only a few weeks after Beechwood’s vote, Levy left his position at Beechwood, and returned full time to Platinum. This manipulation of the Indenture vote secured $98 mm of the proceeds of the Renaissance sale to Platinum Partners.
Platinum’s approach was not entirely opaque. Black Elk Chief Executive Officer John Hoffman emailed Black Elk’s General Counsel and one of its retained counsel on June 26, 2014 that described his take on what was unfolding:
I apologize for this note out of the blue but I need your guidance. Platinum (PPVA) is planning to create many new companies and place the acquisitions [including Northstar] that Black Elk recently technically worked up, bid and won into those new entities. Many if not all of existing equity holders would be left in the cold with no equity in the new companies. Further, they plan to isolate Black Elk, pay themselves back ([Series E] preferred equity) ahead of so called friendly bond holders [the Beechwood entities] and lay off most people. I believe that the ultimate plan is to bankrupt the company.
John Hoffman and the General Counsel eventually jumped ship from the company in August 2014.
Hoffman was also right about Black Elk’s eventual plan. In August 2015, Black Elks creditors had placed the company into involuntary Chapter 7 bankruptcy. The company had 20 days to respond, and it was successful in its motion to convert the case to a voluntary Chapter 11 case, according to court documents.
Later on in the year, the offshore energy driller filed for Chapter 11 bankruptcy.
At about the same time as creditors filed to put Black Elk in bankruptcy, federal prosecutors filed criminal charges against Black Elk related to a 2012 rig explosion in the Gulf of Mexico. The charges stemmed from an investigation conducted by the Bureau of Safety and Environmental Enforcement which ended with 41 citations relating to the fatal explosion. A year after the explosion, Black Elk had spent $12.4 mm trying to clear up the remains and deal with the blast’s legal aftermath.
The Black Elk senior debt in question in the Schmidt vs. Platinum October 2016 case. Source: Bloomberg
But the $98 mm transfer was not enough. Indeed, taking into account Platinum’s own bondholding position in Black Elk totaling $111 mm at face value, with $74 mm held by Platinum, and another $37 mm held through the Beachwood Entities — it is clear that even Platinum lost out from its own transfers. While perhaps the scheme with Black Elk helped shoulder losses and pass them disproportionately to bondholders, Platinum nonetheless suffered a great deal.
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Platinum Partners’ external auditor, BDO, in early 2015 reported to it that “a material weakness exists in the Master Fund’s investment valuation process related to its Level 3 investments.” But, Platinum Partners did not disclose to its investors this important information. The auditor also identified a “very material” misstatement that required a large markdown of the valuation of one large, illiquid position, triggering a restatement of the fund’s year-end 2013 AUM. Platinum Partners, however, terminated that auditor. Still, the replacement auditor, CohnReznick, included in its 2014 opinion, which it did not issue until September 2015, an “emphasis-of-matter” stating that management’s estimated values for investment representing over $800 million rested on unobservable inputs, and that the amounts that might be realized in the near-term could differ materially from management’s valuations.
Platinum Partners used at least three valuation agents: Alvarez & Marsal Valuation Services, LLC, Sterling Valuation Group Inc. and DeGolyer and MacNaughton. There valuation agents were chosen by Platinum Partners and provided their valuation assessments based on the data provided by Platinum Partners. For example, they did not conduct onsite checks on the assets held by Golden Gate and Black Elk as they were not commissioned to do so.
SS&C Technologies, Inc. was a fund administrator for all three funds managed by Platinum Partners. For a portfolio of highly illiquid investments, a fund administrator’s ability to evaluate the value of the portfolio is limited since they rely on the inputs from the auditor and valuation agents.
It is difficult to conclude whether Platinum Partners started as an outright fraud from the very beginning, however, they could not keep up with their promises to investors and covered up problems with lies after lies. The scheme’s collapse was triggered by the bribery case, but Platinum Partners would eventually run out of cash.
Recommendation
Do Not Believe in the Unusually Stable Returns
It is almost impossible to run a hedge fund for over a decade without having a substantial draw-down. All investors should know this simple fact and avoid investing in any investment scheme showing a straight line. Platinum Partners’ investment scheme was also heavily involved with the energy-related investments and the falling oil price should have had material impact on the underlying investments even though they were structured as a secured lending. Instead, the fund only had superficial down periods lasting no more than two months. Indeed, out of 155 months of operation, only three months endured a loss of more than 2%,
Source: The Corporate Prof., Bloomberg
Be aware of risks involved with hard-to-value assets
Secured lending and private equity investments can deliver “stable” returns if operated properly, but the return stream is stable only on the surface. The lack of a market price makes it very difficult for an auditor and an administrator to assess valuation of a portfolio. Investors are exposed to this unobservable risk.
Law360 (July 10, 2019, 10:25 PM EDT) — Brooklyn federal prosecutors failed to convict top Platinum Partners executives on what they once described as “one of the largest and most brazen investment frauds perpetrated on the investing public,” and the charges they convicted on are now in the hands of a skeptical judge — a far cry from the case’s headline-grabbing origins.
Two and a half years after they were indicted, Platinum Partners co-founder Mark Nordlicht and former co-chief investment officer David Levy were convicted Tuesday of defrauding bondholders in portfolio company Black Elk Offshore Operations LLC. But the jury acquitted entirely on the crux of the case: that Nordlicht, Levy and others had run Platinum’s key fund like a Ponzi scheme.
Former Platinum CFO Joseph SanFilippo was also accused of the scheme to defraud investors, and he was found not guilty. In all, the jury acquitted on 15 counts and convicted on six.
Una Dean of Fried Frank Harris Shriver & Jacobson LLP said that while the case took a number of twists and turns, the acquittal on the investment fraud scheme is not a total surprise given U.S. District Judge Brian Cogan’s skepticism of the evidence.
“It’s not common, and it definitely signals something about the nature or sufficiency of the evidence in the case — as perceived by the court at least,” Dean said of the judge’s rulings.
Nordlicht, Levy, SanFilippo and two others were charged with committing a complex fraud on investors in the Platinum Partners Value Arbitrage Fund between 2012 and 2016, as a number of those investors sought to pull funds out of the PPVA. The fund was stocked with oil and gas assets that were still in the exploration stage, making them difficult to sell.
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