Platinum Funds and Founder Mark Nordlicht Accused of $1B Ponzi Scam that Allegedly Bilked Over 600 Hedge Fund Investors

This week, the authorities arrested hedge fund founder Mark Nordlicht and several others over allegations that his Platinum Funds was involved in a $1B ponzi scam that defrauded over 600 investors. They also are facing civil charges brought by the US Securities and Exchange Commission. This is the largest Ponzi scam since the collapse of Bernard Madoff’s multi-billion dollar scheme that bilked investors of $50B.

According to the SEC, it discovered suspect activity during a probe of Platinum Partners and its flagship hedge fund advisory firms, Platinum Management LLC and Platinum Credit Management LP. The firms and Nordlicht are accused of inflating asset values, illicitly moving investor funds to conceal liquidity issues and losses, giving redemptions to the investors whom they favored, overstating the value of one oil company that was a huge asset, and making misrepresentations to bring in new investors during what internally was referred to in documents as a “Hail Mary Time.”

The SEC is accusing Nordlicht of colluding with two colleagues and an executive at Black Elk Energy, which is the funds’ oil investment, to divert nearly $100M from that company to give a “boost” to the Platinum funds. He and others allegedly manipulated a key vote to support Platinum’s position. Also, to meet investor redemption requests, the defendants allegedly took out high-interest rate loans, commingled money within the funds, and improperly raised funds from new investors.

The regulator also has filed civil charges against former Platinum co-chief investment officer David Levy, ex-Platinum fund managing director/portfolio manager Daniel Small, ex-Platinum funds managing general partner Uri Landesman, former Platinum Management investor relations department employee Joseph Mann, Platinum hedge fund CFO Joseph SanFilippo, and Black Elk Energy CFO Jeffrey Shulse.

All of the men were arrested. They have pleaded not guilty to the criminal charges of conspiracy and fraud. In the 48-page indictment, Nordlicht, Landesman, Levy, Mann, and SanFilippo are accused of misrepresenting the value of some of the assets held by the Platinum Partners Value Arbitrage Fund. These were the least liquid assets. They purportedly did this to enhance performance numbers, earn higher fees, and bring in new clients.

Platinum Founder Allegedly Knew Fund Was in Trouble 
The fund reportedly had $1.1B in assets under management earlier in the year. However, Nordlicht reportedly knew the fund was in hot water as far back as 2012. Yet he and others misled subscribers about Black Elk when he valued the oil producer at $283M even though it did not have the cash flow to justify that figure. The inflated valuation came after a rig explosion in the Gulf of Mexico that resulted in an oil spill and three deaths, and Nordlicht continued to misrepresent the fund as doing very well.

Also, Platinum continued to leave out details of negative occurrences at Black Elk and oil producer Golden Gate when investors asked about their high valuations. Auditors were reportedly told that Golden Gate was valued at about $149M at the end of 12/204 and another oil company, Northstar Offshore Group, which is based on Houston, was worth about $143M. In reality, say prosecutors, the two companies were unprofitable, had significant debt, and were dealing with falling oil prices. Meantime, Platinum was late in paying over $14M in Value Arbitrage redemptions to its investors.

The US Attorneys’ Office said that last year, Nordlicht, Small, Levy, Shulse, and others conspired to sell some of Black Elks’ more valuable holdings, seeing as it was practically insolvent. They allegedly moved the funds to Platinum instead of to the oil company’s bondholders, even though they were the ones entitled to first claim on the funds. When Nordlicht discovered that the Golden Gate and Black Elk were failing, he used Northstar to buy many of the assets that Black Elk had remaining. He then joined Northstar and Black Elk under the name PPVA Oil & Gas.

Over the summer, after the arrest of Platinum principal Murray Huberfeld for paying kickbacks to pension fund administrator Norman Seabrook, Platinum Partners filed for Chapter 15 bankruptcy protection. It was while during the investigation into the case against Huberfeld that questions arose regarding Platinum’s attempts to get new investors to provide funds to pay off earlier investors. Brooklyn prosecutors then raided Platinum’s offices.

Nordlicht founded Platinum in 2013 using seed money provided by Huberfeld. Through 2015, the hedge fund reported 17% average gains with no bad years despite investing in a number of ventures that led to sanctions for others and two Ponzi scams.

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Authorities Allege $1B Fraud at Platinum Partners, Wall Street Journal, December 19, 2016

Platinum Partners Founder an Chief Investment Officer Among Five Indicted in a $1B Investment Fraud, US DOJ, December 19, 2016