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SEC Charges Founder of Platinum Partners and Two of its Flagship Hedge Fund Advisory Firms with Fraud and Ponzi like Activity

On December 19th, 2016 the Securities and Exchange Commission (“SEC”) filed a Complaint (the “Complaint”) against Defendants Platinum Management, LLC (“Platinum Management”), Platinum Credit Management, L.P.(“Platinum Credit”), Mark Nordlicht (“Nordlicht”), David Levy (“Levy”), Daniel Small (“Small”), Uri Landesman (“Landesman”), Joseph Mann (“Mann”), Joseph San Filippo (“San Filippo”) (collectively the “Platinum Defendants”), and Jeffrey Shulse (“Shulse”) (all collectively “Defendants”), charging Defendants with a complex, multi-pronged, fraudulent scheme to inflate returns to investors, and cover up massive losses and liquidity problems.

Prosecutors allege that Platinum Defendants collectively engaged in one of the largest investment frauds since Bernie Maddoff’s elaborate Ponzi scheme was uncovered in 2008.  On paper, Platinum Management averaged compound returns of 17% a year from 2003 to 2015, making it one of the best performing New York based hedge funds in the industry.  The Complaint draws question to Platinum Management’s 17% yearly return, given that many positions were fraudulently overvalued, and the fund engaged in heavy high interest short term borrowing to pay back costumer redemptions. The true performance of the hedge fund won’t be found out until the entire fund is liquidated and the SEC completes its investigation.

Platinum Management permitted more liquidity to investors then many of their competitors, permitting freedom to redeem funds on 60 or 90 days’ notice.  The firm heavily advertised this advantage; the capacity for the firm to rapidly liquidate positions.  The Complaint alleges that in reality, Platinum Management was facing an urgent liquidity crises, brought on by several large illiquid investments in oil production companies.  In as early as 2012, internal correspondence among Platinum Management officials spoke of fund redemptions that were “relentless,” and a “code red,” meanwhile continuing to conceal from current and prospective investors the precarious position of the fund.

One these illiquid poorly performing investments, Golden Gate Oil LLC (“Golden Gate”), Platinum Management valued at approximately $170 million, when in fact it was worth a tiny fraction of that, and never paid any interest on Platinum Management loans.  The Complaint notes that one of the most blatant pieces of evidence of the fraudulent overvaluation of Golden Gate was the fact that Platinum Management, doubling down on their bet on the domestic oil market, purchased the remaining 52% of Golden Gate for only $3.2 million, while continuing to value the company—which had never turned a profit—at $170 million.  Another example of Golden Gate’s overvaluation occurred in 2013, when Platinum Management granted its partner an option to buy one of Golden Gate’s main oil fields for $6.2 million, while carrying the assets’ value on the books at closer to $70 million.

The Complaint alleges that by 2014, unable to meet investor redemptions, Platinum Management resorted to heavy short-term borrowing at annual interest rates as high as 19%, and paying costumer redemptions with this money borrowed at margin.  The Complaint further alleges that CFO, San Filippo, fraudulently termed this heavy short term borrowing as necessary to cover “investment transactions,” completely mischaracterizing the true nature of the loans: to pay back existing customers funds due.

By 2015, unable to meet investor redemptions, Platinum Partners officials began pressing investors to defer or cancel their redemtion requests.  At the same time, they began actively soliciting new investor money, desperate for new funds to offset the liquidity crisis.  Platinum Management also began repaying redemptions preferentially, rather than sequentially, which is a violation of SEC and the Financial Industry National Regulatory Authority (“FINRA”) rules.

The Complaint also notes that Platinum Management repeatedly hired and then terminated external auditors who were tasked with compiling financial reports for investors, when these reports gave disfavorable analysis.  One such replacement auditor noted that Platinum Management’s estimated values for its investments rested over $800 million on “unobservable inputs,” meaning much of the realized valuation could differ significantly from Platinum Management’s projections.

If you have invested in any Platinum Partner funds, or have suffered any losses as a result of investment and securities fraud, the attorneys at Lax & Neville LLP have extensive experience in successfully prosecuting claims on behalf of customers.  Please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.