Platinum Partners Executives Become Most Predictable Arrests Ever

Rule number one of running a hedge fund like a Ponzi scheme: Don't.
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Rob Lavinsky, iRocks.com – CC-BY-SA-3.0 [CC BY-SA 3.0], via Wikimedia Commons

All that glitters... Rob Lavinsky, iRocks.com – CC-BY-SA-3.0 [CC BY-SA 3.0], via Wikimedia Commons

It seemed that Platinum Partners had the perfect, if somewhat morally dubious, strategy: Invest in the scandal-plagued and the Biblically usurious and the dying (the latter without their knowledge), and sextuple your clients’ money. It was, one delightfully understated Reuters source said, rather “aggressive,” perhaps not for the faint of heart, but all quite “within the limits of the law.”

It turns out, however, that such returns are not built only on legitimate scumminess, nor even mere kickbacks for union pension money. No, accomplishing Platinum Partners’ achievements allegedly required some more extra-legal means. Specifically, making up returns:

The indictment unsealed Monday in federal court in Brooklyn charges Platinum founder and Chief Investment Officer Mark Nordlicht, co-chief investment officer David Levy, and former president Uri Landesman with counts of securities fraud, investment adviser fraud and conspiracy.

Authorities said they and others erroneously inflated the value of Platinum’s assets, allowing the firm to collect a hefty cut of all investment gains and project a veneer of financial stability. In actuality, the firm’s investments were worth far less, and Platinum’s executives knowingly faked the performance figures, authorities said.

Unfortunately for Nordlicht, et. al., simply goosing performance gains wasn’t quite enough, either, as allegedly overcharging investors based on purely aspirational returns and asset levels still didn’t leave enough money around to avoid recourse to a Ponzi scheme.

Ultimately, when the firm was unable to pay all of its investors back, executives decided to pay some ahead of others, prosecutors said.

PPVA's growing concentration in illiquid positions made it ever-more difficult for Platinum Management to pay investor redemptions on time each quarter. Internal documents discussing redemptions are replete with references such as "Hail Mary time," and of hoping that new subscriptions would prove sufficient to pay current redemptions. As early as November 2012, Nordlicht and Landesman complained that redemptions were "daunting" and "relentless," and in June 2014 Nordlicht wrote Landesman that "It can't go on like this or practically we will need to wind down....this is code red ... We can't pay out 25 million in reds[redemptions]per quarter and have 5 come in…."

"We are pushing hard, illiquidity a bigger hurdle than energy concentration...Need monetization liquidity events in the fund..." Nordlicht replied: "....We just need to short term go crazy, get everyone focused, and long term try to come up with marketing pitches where we can raise even when we are illiquid."

Alas, Ponzi schemes have a fatal flaw, one that tends to reveal itself when you’re forced to shut your hedge fund down and file for bankruptcy in the wake of a pay-to-play scandal: It is hard to pay out redemptions with new investor money when there isn’t any of the latter coming in anymore. Co-founders Nordlicht and Murray Huberfeld—he of the Ferragamo bags allegedly filled with tens of thousands of dollars—should have stuck with rainy-day Plan A.

In December 2015, Messrs. Huberfeld and Nordlicht discussed fleeing the U.S. for Israel, according to the indictment.

“Don’t forget books,” Mr. Huberfeld wrote to his partner in an email, the indictment says. “Assume we are not coming back to ny…Take passport.”

Platinum Partners’ Executives Charged With $1 Billion Securities Fraud [WSJ]
Platinum Partners Hedge Fund Founder and 6 Others Charged With Fraud [NYT]
SEC complaint

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