Tuesday, January 3, 2017

No. 195: Platinum Partners—Criminal and Civil Charges Filed Against Seven Individuals

On December 14, 2016, U.S. Attorney Robert L. Capers of the Eastern District of New York filed a 49-page indictment charging seven current and former principals of Platinum Partners, a hedge fund, with criminal activity. The indictment was filed under seal. A magistrate judge unsealed the indictment two days later, after the defendants were arrested. The case was assigned to U.S. District Court Chief Judge Dora Lizette Irizarry. President George W. Bush nominated her, and the Senate confirmed her in June 2004. She became Chief Judge in April 2016. (See U.S.A. v. Nordlicht, U.S. District Court, Eastern District of New York, Case No. 1:16-cr-640.)

On December 19, the Securities and Exchange Commission (SEC) filed a 60-page civil complaint against two Platinum units and the same seven individuals. The case was assigned initially to U.S. District Court Judge Kiyo A. Matsumoto. President George W. Bush nominated her, and the Senate confirmed her in July 2008. (See SEC v. Platinum, U.S. District Court, Eastern District of New York, Case No. 1:16-cv-6848.)

The Defendants
The two Platinum units that are defendants in the SEC civil complaint are Platinum Management (NY) LLC and Platinum Credit Management LP. The seven individual defendants in both cases are Mark Nordlicht, one of Platinum's founders and its chief investment officer; David Levy, Platinum's co-chief investment officer; Uri Landesman, former managing partner and president of Platinum; Joseph Sanfilippo, chief financial officer of a Platinum unit; Joseph Mann, a member of Platinum's investor relations and finance departments; Daniel Small, a former managing director and co-portfolio manager of Platinum; and Jeffrey Shulse, former chief executive officer and chief financial officer of a Platinum unit.

The Indictment
The indictment includes eight counts: one count of conspiracy to commit securities fraud and investment adviser fraud, one count of conspiracy to commit securities fraud, three counts of securities fraud, one count of investment adviser fraud, and two counts of conspiracy to commit wire fraud. Nordlicht and Levy are charged with all eight counts; Landesman, Sanfilippo, and Mann with five counts; and Small and Shulse with three counts.

On December 19, six of the seven defendants pleaded not guilty on all counts, and were released on bond. Nordlicht's bond was set at $5 million, Levy's at $2 million, Landesman's at $2 million, Sanfilippo's at $2 million, Mann's at $1 million, and Small's at $600,000. I believe that Shulse will enter a plea soon, and that Small may change his plea.

The SEC Civil Complaint
The SEC civil complaint includes 11 claims for relief: three claims of violations of the Advisers Act, two claims of aiding and abetting violations of the Advisers Act, two claims of violations of the Securities Act, one claim of aiding and abetting violations of the Securities Act, two claims of violations of the Exchange Act, and one claim of aiding and abetting violations of the Exchange Act. Platinum Management is charged with five claims, Platinum Credit with four claims, Nordlicht with seven claims, Landesman and Sanfilippo with five claims, Levy with four claims, Mann and Small with three claims, and Shulse with two claims.

On December 19, Judge Matsumoto held a show cause hearing at which the parties agreed to a temporary restraining order and the appointment of Bart Schwartz as receiver. The purposes of these actions were to prevent violations of securities and other laws, prevent bankruptcy filings, prevent destruction or alteration of documents, and grant expedited discovery in preparation for a preliminary injunction hearing.

On December 22, the case was reassigned to Chief Judge Irizarry. A preliminary injunction hearing is scheduled for January 6, 2017.

The Press Release
On December 19, U.S. Attorney Capers issued a five-page press release, and he announced at a press conference the unsealing of the indictment. Representatives of the Federal Bureau of Investigation and the U.S. Postal Inspection Service accompanied him.

Capers said: "If convicted, each of the defendants faces a maximum sentence of 20 years' imprisonment." He also said:
As alleged, Nordlicht and his cohorts engaged in one of the largest and most brazen investment frauds perpetrated on the investing public, earning Platinum more than $100 million in fees during the charged conspiracy. Platinum Partners purported to be a standard bearer in the hedge fund industry, reporting average annual returns of more than 17 percent since inception in 2003. In reality, their returns were the result of overvaluation of their largest assets, which eventually led to Nordlicht and his co-conspirators operating Platinum like a Ponzi scheme, where they used loans and new investor funds to pay off existing investors. The charges and arrests announced today reflect our steadfast commitment to holding accountable hedge funds on Wall Street who rip off investors for personal gain.
The Expression "Ponzi Scheme"
A dictionary definition of "Ponzi scheme" is "an investment scheme in which some early investors are paid off with money put up by later ones in order to encourage more and bigger risks." The scheme perpetrated by swindler Charles Ponzi collapsed in 1920. Ponzi schemes always collapse; the only question is how long they last before they unravel.

Neither the indictment nor the SEC civil complaint used the word "Ponzi." However, Capers used the expression "like a Ponzi scheme" in his press release, as quoted above. One of the news articles about the case was entitled "A 'Ponzi-esque' Scheme That Came Undone." Another news article called the scheme "one of the largest such fraud cases since Bernard L. Madoff's investment firm unraveled in 2008."

It is difficult to resist using the word "Ponzi," given statements in the court filings. For example, on page 18 of the indictment, it says: "Platinum never disclosed to investors and prospective investors that it was using new investments to pay redemptions..." Similarly, on page 2 of the SEC civil complaint, it says: "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."

An Earlier Development
In No. 180 (posted September 9, 2016), I discussed an earlier federal criminal action relating to Platinum Partners. Norman Seabrook is a former official of New York City's Correction Officers Benevolent Association (COBA). Murray Huberfeld is one of the founders of Platinum Partners. On July 7, 2016, U.S. Attorney Preet Bharara of the Southern District of New York filed an indictment charging Seabrook and Huberfeld with one count of conspiracy to commit honest services wire fraud and one count of honest services wire fraud. The indictment alleges that a "kickback scheme" deprived COBA members of Seabrook's "honest services" when COBA's annuity fund and COBA's general fund invested in Platinum offerings. A status conference is scheduled for January 6, 2017. (See U.S.A. v. Seabrook, U.S. District Court, Southern District of New York, Case No. 1:16-cr-467.)

Another Earlier Development
In No. 182 (posted October 7, 2016), I discussed an earlier civil lawsuit that two subsidiaries of CNO Financial Group filed on September 29, 2016 against three individuals associated with Platinum. The CNO subsidiaries had transferred their long-term care (LTC) insurance liabilities through reinsurance arrangements with an entity that had close ties to Platinum. The CNO subsidiaries alleged they had been misled when they entered into the reinsurance arrangements. The lawsuit remains pending. (See Bankers Conseco Life v. Feuer, U.S. District Court, Southern District of New York, Case No. 1:16-cv-76436.)

I also discussed demand letters that the CNO subsidiaries received from their state insurance regulators, who had found the reinsurance arrangements unacceptable. The subsidiaries recaptured the reinsurance.

General Observations
Readers may wonder why I am posting this item about the Platinum cases, since they are about investments rather than insurance. The answer is that Platinum is at the center of several criminal and civil lawsuits related to insurance. For example, I mentioned Platinum in earlier posts relating to LTC insurance at CNO (formerly Conseco) and at Senior Health Insurance Company of Pennsylvania, a former Conseco subsidiary. In addition to Nos. 180 and 182 mentioned earlier, see Nos. 174 (August 11, 2016), 175 (August 18, 2016), 183 (October 19, 2016), and 185 (November 4, 2016).

I believe that the criminal and civil charges against the defendants are serious, and that the evidence against the defendants is strong. I plan to report further developments in the two cases.

Available Material
I am offering a complimentary 114-page PDF consisting of the Capers press release (5 pages), the indictment (49 pages), and the SEC civil complaint (60 pages). Email jmbelth@gmail.com and ask for the January 2017 package relating to the Platinum cases.