Platinum Partners, a once-promising hedge fund that had soaring returns for investors, is being liquidated after an indictment was filed against seven insiders. The indictment, unsealed Monday by U.S. Attorney Robert Capers, accuses Mark Nordlicht, a founder of the firm, and six others of running a $1 billion Ponzi-like scheme that defrauded Platinum’s investors.
Nordlicht and his co-conspirators are charged with securities fraud, investment adviser fraud and conspiracy for allegedly operating the Platinum funds “like a massive and brazen ponzi scheme,” said Capers. The indictment alleges that, over the course of the scheme, Nordlicht and his co-conspirators diverted more than $100 million in fees to themselves based on the overvaluation of PPVA’s largest assets. In addition, the indictment alleges that a number of Platinum’s senior officers concealed severe cash flow problems at PPVA and used loans and new investor money to pay off existing investors.
The indictment also charges three former executives of a related company, Black Elk Energy, with conspiring to rig the bond covenants for that oil and gas company so they could extract millions of dollars from it. Prosecutors say that Norman Seabrook, the head of the city’s prison guard union, received tens of thousands of dollars in exchange for steering $20 million in pension money to Platinum.
Earlier this year, a Cayman Islands court placed PPVA and its sister fund PPCO into official liquidation. The two funds had more than $1.3 billion under management before their collapse.
In a statement, the United States Attorney’s Office for the Eastern District of New York described the conspiracy as one of the largest and most brazen investment frauds in history. The indictment alleges that Nordlicht and his co-conspirators exploited the illiquid nature of PPVA’s portfolio of investments, overvalued them to boost performance numbers, attracted new investors, retained existing investors and extracted high management and incentive fees.
Additionally, the indictment alleges that Nordlicht and other Platinum Partners managers concealed a significant cash crunch at PPVA and exploited high-interest loans between PPVA and other related hedge funds to fund a large portion of Platinum’s expenses and avoid paying its master fund. The indictment further alleges that PPVA’s executive officers engaged in “deceptive and misleading communication” with the Master Fund and other investors.
These violations of the law are serious, and have the potential to harm the economy, said Capers. It is therefore important that the criminal charges be pursued aggressively.
The criminal charges against Nordlicht and his co-conspirators should serve as a cautionary tale to the investment community and the general public. They are an indication that, in the future, investment advisers and their senior executives must be more careful about how they present information to their clients.
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