Hedge Fund Company Charged with $1 Billion Fraud

By - December 20, 2016
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The top executives of the hedge fund manager Platinum Partners in New York City were arrested this week and charged with a $1 billion fraud scheme. Federal prosecutors said that it had become a Ponzi-like scheme as its biggest investments had plunged in value.

Platinum Partners was led by Mark Nordlicht, who was known for many years for producing 17% returns with the largest fund. This was done by taken what was seen as a very aggressive approach to fund management and investing.

Nordlicht, who was the founding partner of Platinum and the chief investment officer, was placed under arrest by federal agents in his home in New Rochelle, NY. Federal prosecutors have accused him and six other managers of participating in a scheme to defraud investors.

According to Brooklyn US Attorney Robert Capers, the charges highlight how brazen the defendants’ lies and deceit have been. Capers also stated that the fraud case was one of the biggest and most brazen he has ever seen.

What Is Securities Fraud?

Securities fraud is complex but it refers to any type of fraud that is related to securities, which include stocks and bonds. As a company becomes a public entity, it must disclose a huge amount of information to federal regulators at the SEC and others, as well as to potential investors.

However, complying with the initial requirements when going public is not enough to avoid being charged with securities fraud later. Throughout the entire life of a public company, responsible parties in the company may obtain sensitive information that could have an effect upon potential investors. How the information is used could result in being charged with securities fraud, if it is used to enrich people at the company.

Securities fraud is handled by the federal government because federal statutes and laws are used to say which securities and commodities can be traded on the major public exchanges.

The United States Code has a great deal of regulations and laws about security trading, but much information also is contained in the Securities Exchange Act of 1934. This Act goes back to the Great Depression and was designed to protect investors from fraudulent securities by requiring a disclosure of material facts that are related to any securities that are traded on a major stock exchange.

Each count of securities fraud can carry a prison sentence of five years.

The SEC has announced parallel charges against the same executives, and also two Platinum entities for similar charges at the civil level.

According to the 48 page federal criminal indictment, since 2012 Nordlicht and four others have been defrauding investors by overvaluing illiquid assets that were held by Platinum Partners Value Arbitrage funds. Most of them were troubled energy industry investments.

This led to what federal prosecutors called a ‘severe liquidity crisis’ that Platinum tried to fix by making high interest loans between funds. The fund also selectively paid some investors before others were paid.

Platinum Partners was founded in 2003 and until this year had nearly $2 billion of assets under management. It had more than 600 investors. Some of the investors came from a Jewish community in New York where Nordlicht and other executives in the firm are from. One of the clients is a charitable trust that was set up by a major day trading pioneer named Aaron Elbogen.

The indictment details how angry investors tried to take their money out in early 2016 as Platinum hinted that some of its assets were in trouble. It also mentions several emails between Nordlicht and another executive where the men talked about running away to Israel to get away from the heat.

Prosecutors stated that David Levy, who was the firm’s co-chief investment officer, and Uri Landesman, the ex-president of one of the organization’s top funds, also were in on the fraud. Prosecutors claim that the scheme extracted more than $100 million in fees from clients based upon phony asset values.

Nordlicht and Levy also allegedly tried to defraud bondholders of Black Elk out of more than $50 million. Black Elk was a Texas energy company that has since closed.

Nordlicht has pleaded not guilty to charges, which include securities fraud and has been granted bail on a $5 million bond that was secured by $500,000 in cash.

The FBI and the US Postal Inspection Service raided Platinum’s offices in Manhattan in June in another fraud investigation that led to the indictments this week.

This scheme has been called one of the biggest since Bernie Madoff’s famous Ponzi scheme.

It also is alleged that Nordlicht and others knew that one of the big funds run by Platinum was in trouble in 2012, but the suspects allegedly defrauded dozens of investors by overvaluing the firm’s biggest assets. The goal was to hid the cash flow problems in the firm’s biggest fund.