The founder of the New York-based hedge fund Platinum Partners and six associates were arrested and charged Dec. 19 with securities and investment adviser fraud over what federal authorities said was a $1 billion investment scam, in part using the assets of a now-defunct oil driller.
Founder Mark Nordlicht and David Levy, his co-chief investment officer at Platinum, were involved in an effort to defraud investors from 2011 to 2016, according to an indictment filed in U.S. District Court for the Eastern District of New York. The indictment claims the two were joined by several other associates in 2012 to commit fraud through "material misrepresentations and omissions" relating to assets controlled by the fund.
Nordlicht and his associates "engaged in one of the largest and most brazen investment frauds perpetrated on the investing public," U.S. Attorney Robert Capers said in a statement accompanying the indictment. They are accused of systematically overstating the value of assets held in Platinum funds and then relying on high-interest loans from other Platinum funds and new investments to repay older investors, all while raking in fees.
"[The defendants] concealed a growing liquidity crisis by transferring money between the funds, making preferential redemptions to favored investors, and using misrepresentations to attract new investors to the struggling funds during what internal documents described as 'Hail Mary time,'" the SEC said.
Among other assets, Platinum at one point controlled the now-defunct Black Elk Energy Offshore Operations, which owned a drilling platform in the Gulf of Mexico where three people were killed in a November 2012 accident. The explosion on the Black Elk platform occurred during "hot work," or activities that generate heat or sparks, near an oil storage tank, which ignited hydrocarbon vapors, according to investigators. The company later filed for bankruptcy and has been dissolved.
As part of the indictment, the SEC said Nordlicht masterminded a scheme to divert almost $100 million from Black Elk to boost Platinum funds.
"Platinum Partners purported to be a standard bearer in the hedge fund industry, reporting annual average returns of more than 17% 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," he said. "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."
One of the first indications that Nordlicht, Levy and Platinum were under scrutiny came in early November, when a Black Elk bankruptcy trustee filed suit in state court in Harris County, Texas, "alleging gross negligence, breaches of fiduciary duty, fraud and breaches of an operating agreement by the hedge fund investors, managers (directors) and officers of Black Elk." In a Nov. 23 federal bankruptcy filing by Black Elk, Nordlicht, Levy and several others said they were "facing potential claims and/or lawsuits from the bankruptcy trustee, the Securities and Exchange Commission, the U.S. Department of Justice, the Internal Revenue Service, the U.S Postal Service, and other individuals or entities."
Nordlicht, Levy, Uri Landesman, Joseph SanFilippo and Joseph Mann were charged with securities fraud, investment adviser fraud and several conspiracy counts relating to allegedly defrauding Platinum investors. Nordlicht and Levy also face securities fraud and conspiracy charges for allegedly victimizing Black Elk investors, along with Daniel Small and Jeffrey Shulse. Landesman, SanFilippo, Mann and Small are also current or former Platinum officials, while Shulse is a former CEO of Black Elk.