The U.S. Securities and Exchange Commission (SEC) recently charged the founder of Platinum Partners and two of its flagship hedge fund advisory firms with conducting a fraudulent scheme to inflate asset values and illicitly move investor money to cover losses and liquidity problems.

The agency uncovered suspicious activity during an examination of the firms and referred it for further investigation. The SEC alleges that Mark Nordlicht and the Platinum funds overstated the value of an oil company that was among their largest assets, and they concealed a growing liquidity crisis by transferring money between the funds, making preferential redemptions to favored investors, and using misrepresentations to attract new investors to the struggling funds during what internal documents described as “Hail Mary time.”

It is further alleged that Nordlicht schemed with two colleagues and an executive at the Platinum funds’ other major oil investment to divert almost $100 million from that company to help boost the Platinum funds. That company’s noteholders had priority over preferred shares, and Platinum’s management and its affiliates were prohibited from participating in any vote among noteholders to change this priority. So Nordlicht and others allegedly rigged the vote by secretly transferring a large block of notes to affiliates, which then cast votes in support of Platinum’s position. The solicitation document falsely stated that Platinum held only a small minority of the notes.

Andrew J. Ceresney, director of the SEC’s Division of Enforcement, commented:

As alleged in our complaint, investors were repeatedly presented a false picture of the performance of the Platinum funds and their overall liquidity situation.  As investors sought redemptions, the defendants engaged in numerous improper measures in an attempt to meet redemption requests, including taking out high-interest rate loans, commingling monies among funds, and raising money from new investors through fraudulent misrepresentations.

Others charged in addition to Nordlicht, Platinum Management and Platinum Credit Management:

• David Levy, owner and co-chief investment officer along with Nordlicht
• Daniel Small, former managing director and portfolio manager of certain Platinum funds
• Uri Landesman, former managing general partner of certain Platinum funds
• Joseph Mann, who worked in Platinum Management’s investor relations department
• Joseph SanFilippo, CFO of a Platinum hedge fund
• Jeffrey Shulse, CFO of Black Elk Energy, the oil company used in the illicit $100 million scheme

In parallel action, the U.S. Attorney’s Office announced criminal charges as well.

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