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Platinum Partners: A Ponzi Scheme Hiding in Plain Sight

No One Questioned This Hedge Fund’s Madoff-Like Returns, by Zeke Faux and published in Bloomberg.com (Jan. 4, 2017), discusses the possibly $1 billion fraud alleged to have been engineered by Platinum Partners entities under the direction of Mark Nordlicht and others.  From this article we take away two principal points:

  1. Any sense that the SEC regulatory regime has wised up and will prevent another Madoff may be misplaced; and
  2. When told that a company’s auditors and an independent valuation consultant have reached reassuring conclusions, bear in mind GIGO: garbage in, garbage out.

Where the Platinum Ponzi Matter Now Stands

Platinum Partners Value Arbitrage Fund L.P. (“PPVA”) and Platinum Partners Value Arbitrage Fund (International) Ltd. (“PPVAI”) were placed into liquidation in the Cayman Islands.  The liquidators successfully petitioned in the United States Bankruptcy Court for the Southern District of New York for recognition of a foreign proceeding under chapter 15 of the Bankruptcy Code.[1]

In December 2016, the Securities and Exchange Commission filed a civil complaint (the “SEC Complaint”) against two other Platinum entities, Nordlicht, and other persons.  The SEC Complaint alleges securities fraud counts, describes the alleged fraud in great detail, and seeks the appointment of a federal equity receiver.[2]  Also in December 2016, federal prosecutors charged Platinum entities, Nordlicht, and other persons with criminal fraud.[3]

The SEC’s Allegations

The SEC complaint provides detail on the many dimensions of the alleged fraud.  For present purposes we quote the summary provided by Kathy Bazoian Phelps, in her invaluable The Ponzi Scheme Blog, in its December 2016 Ponzi Roundup post:

Mark Nordlicht, 48, David Levy, 31, and Uri Landesman, 55, were accused of running a Ponzi scheme through Platinum Partners. Landesman is the president of the $1.3 billion hedge fund. They are accused of falsely reporting the value of Platinum’s assets and using high-interest loans to move money between funds to pay some investors ahead of others. One example of misrepresentation relates to the value of Black Elk Energy, an oil and gas company controlled by Platinum, which was valued at $283 million after there had been an explosion on a Black Elk platform in the Gulf of Mexico that caused the death of 3 workers, other injuries and an oil spill. The alleged fraudulent activity also involves the funds dealings with Lafitte Energy Corp. and Golden Gate Oil LLC. Others charged in connection with the matter are Joseph Mann, 24, Daniel Small, 47, Jeffrey Schulse, 44, and Joseph Sanfilippo, 38. The Platinum Partners executives collected $100 million in fees as they offered investors annual returns of up to 17%.[4]

Red Flags of Fraud, Missed

In his article No One Questioned This Hedge Fund’s Madoff-Like Returns, Faux cites red flags missed by the SEC.

First, from 2003 through 2014, investors in the hedge fund received unusually stable annual returns, with no down years, even through the deepest national financial crisis since the Great Depression (for a chart, see the deep-dive report prepared by Star Magnolia Capital).  Recall that the Madoff fraud featured similarly reliable annual returns, irrespective of the waxing and waning of returns by funds managed by other leading portfolio managers.  The mirrored behavior of the Platinum funds to Madoff could have been identified as a red flag of fraud years earlier.

Second, in 2007, Bank of Montreal accused Nordlicht of helping a rogue trader.

Third, Platinum entities under Nordlicht’s direction funded the Scott Rothstein Ponzi scheme and somehow got out whole.

Fourth, Platinum entities under Nordlicht’s direction oversaw the investment strategy for Platinum-related funds in a notorious scheme by a Los Angeles rabbi who, as Faux puts it, was alleged by the SEC of having “tricked terminally ill hospice patients into providing personal information so annuities could be purchased in their names.”

Faux reports that Platinum’s auditors and independent valuation consultants looked only at information provided by Platinum.  He writes, “those gatekeepers relied upon Platinum to provide information about its investments.  The valuation consultant says the firm never visited the California oil fields that supposedly accounted for much of Platinum’s assets.  Even a simple check of public records would have revealed they were barely producing oil.”

The Unraveling: A News Report, a Worried Investor

According to Cayman Islands liquidator Christopher Barnett Kennedy, the unraveling of Platinum accelerated toward liquidation because of a news report and an alarmed investor in Platinum.  The news report, this one, also written by Faux, was published by Bloomberg in October 2015, setting out the red flags above (and others).  Platinum investor Parris Investments Limited saw and acted, making a redemption request of PPVAI.  After getting the runaround from PPVAI and  not receiving its requested redemption, Parris initiated the liquidation proceedings in the Caymen Islands in July 2016.[5]  This led to the chapter 15 bankruptcy case and got the attention of the SEC and federal prosecutors.

More on Ponzi Schemes

For more on frauds, fakes and Ponzis, we recommend the Financial Poise column (Alleged) Frauds, Fakes and Ponzis, which is written by Chicago attorney Adam Hirsch as well as Episode 92 of Financial Poise Radio where Hirsch was a guest commentatorAlso, Commercial Bankruptcy Investor recently published an article by Brad Daniel on the Life Partners Ponzi-like fraud involving viatical settlements and wagers on the impending death of elderly peopleSee here.

The SEC complaint regarding Platinum seeks appointment of a federal equity receiver to secure and manage the assets of certain Platinum entities. Many Ponzi schemes are unraveled by federal equity receivers appointed by federal district courts at the request of the SEC or other federal agencies.  The National Association of Federal Equity Receivers (“NAFER”) is the principal organization from which one can learn more about federal equity receivers. For more on NAFER’s most recent annual national conference, see hereLater this year, Financial Poise Webinars will offer Federal Equity Receiverships — 101, during which NAFER members will share their knowledge and experience.

[1]  In Platinum Partners Value Arbitrage Fund LP, case number 16-12925 (Bankr. S.D.N.Y).

[2] SEC v. Platinum Management, case number [not available] (E.D.N.Y.)

[3] U.S. v. Nordlicht, case number 1:16-cr-00640 (E.D.N.Y.).

[4] Phelps is co-author with the Hon. Steven Rhodes of The Ponzi Book: A Legal Resource for Unraveling Ponzi Schemes (Lexis/Nexis 2016).

[5] See Declaration of Christopher Barnett Kennedy in Support of Chapter 15 Petitions for Recognition as Foreign Main Proceedings, Docket No.2 in In Platinum Partners Value Arbitrage Fund LP, case number 16-12925 (Bankr. S.D.N.Y) at paragraphs 21-26, and Exhibit A thereto, at paragraphs 15-33 (of the Liquidation Petition).

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