Tuesday, December 20, 2016

Mark Nordlicht, a founder and the chief investment officer of Platinum Partners, and six others arrested on charges related to a $1 billion fraud

Platinum Hedge Fund Executives Charged With $1 Billion Fraud


DEC. 19, 2016

Robert Capers, the United States attorney in Brooklyn, arriving at federal court on Monday to announce the indictment of Mark Nordlicht, the founder and chief investment officer of Platinum Partners, and six other individuals on securities fraud, investment adviser fraud and conspiracy. Credit Andrew Kelly/Reuters

For years, the little-known New York hedge fund Platinum Partners stood out for double-digit investment returns that rivaled some of the biggest names in the industry.

It turned out that those returns were too good to be true, according to federal prosecutors.

Federal agents on Monday arrested Mark Nordlicht, a founder and the chief investment officer of Platinum, and six others on charges related to a $1 billion fraud that led the firm to be operated “like a Ponzi scheme,” prosecutors said. It is one of the largest such fraud cases since Bernard L. Madoff’s investment firm unraveled in 2008.

David Levy, the firm’s co-chief investment officer, was also among those arrested in the morning by agents in Texas, Manhattan and New Rochelle, a suburb of New York City. The men were charged with securities fraud and investment adviser fraud, according to an unsealed indictment filed in Federal District Court in Brooklyn. The Securities and Exchange Commission filed a parallel civil case.

Platinum tapped prominent families and foundations within the Orthodox Jewish community in New York to fuel high-stake bets on payday lenders, oil companies and even the terminally ill. But prosecutors said these investments and the firm’s performance were misrepresented by its executives. Ultimately, Platinum took in new money in order to pay longtime investors who wanted their money back, something the firm’s executives called among themselves “Hail Mary time.”

“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,” said Andrew J. Ceresney, the director of the S.E.C.’s enforcement division.

Located a few blocks from Central Park, Platinum, founded in 2003, made a splash early on with some of its investments. In one bet, the firm sought to profit from the death of terminally ill patients by investing in variable insurance payouts. As part of the scheme, a rabbi in Los Angeles sought out hospice patients to get their personal details that could be used to buy insurance payouts in their names.

A company that Platinum set up to make the investments was fined by the S.E.C. in January 2015. “We definitely were exploiting a loophole, but it was fully vetted by legal counsel,” Mr. Nordlicht said in an interview with Bloomberg later that year.

In other bets, Platinum misled both investors and auditors — sometimes brazenly. In December 2012, for example, executives misrepresented to auditors the value of Black Elk Energy, an oil and gas company controlled by Platinum, valuing it at $283 million, prosecutors said. In fact, there had been an explosion on a Black Elk platform in the Gulf of Mexico the month before that had caused the deaths of three workers, injuries to other employees and an oil spill. Black Elk no longer exists.

Jeffrey Shulse, who worked at Black Elk and is named in the government’s indictment, denied the charges. “Mr. Shulse’s indictment is a clear case of overreaching,” said F. Andino Reynal, Mr. Shulse’s lawyer, adding that his client was “confident that once a jury has had a chance to hear all the facts, it will exonerate him of any wrongdoing.”

Lawyers for the defendants Mr. Nordlicht, Daniel Small, Uri Landesman, Joseph Mann and Joseph San Filippo did not respond to a request for comment. Michael Sommer, a lawyer for Mr. Levy, said he looked forward to “clearing David Levy’s good name.” Photo

Murray Huberfeld, right, a former executive of the hedge fund Platinum Partners, leaving Manhattan Federal District Court after his arraignment on federal corruption charges in June. Credit Bryan R. Smith for The New York Times

As recently as March, Platinum had $1.7 billion of investor money, as of a March regulatory filing. For years it reported a strong performance — with annual average returns of 17 percent.

As recent as last year, Platinum said it made gains of 8 percent, a strong performance in a year when the average hedge fund lost 0.85 percent, according to the Hedge Fund Research Composite Index, a gauge of industry performance.

Platinum began to have trouble extracting investor money when some of its obscure investments started to sour, according to prosecutors. From 2013 to 2016, the firm could not stanch the losses in certain funds and the investor requests to withdraw money, so it began to move money between funds in what Mr. Nordlicht called a “big stew,” the indictment said.

Things seemed to reach a crisis point in June 2014, prosecutors said. “It can’t go on like this or practically we will need to wind down....this is code red,” Mr. Nordlicht wrote to Mr. Landesman, a managing director at Platinum, at the time.

Yet investors remained in the dark about the firm’s precarious liquidity position. A month later, when an investor emailed to ask about the reliability of Platinum’s reported performance figures, Mr. Landesman replied, “The numbers are all kosher, they have had verbal input every month.”

Investors grew restless. By March 2015, the total amount they requested to withdraw from the firm exceeded $83 million. Eventually, executives decided to pay some ahead of others, prosecutors said.

“Platinum Partners purported to be a standard-bearer in the hedge fund industry,” said Robert L. Capers, the United States attorney for the Eastern District of New York. “In reality, their returns were the result of the overvaluation of their largest assets.” This inflation led to Mr. Nordlicht and others “operating Platinum like a Ponzi scheme, where they used loans and new investor funds to pay off existing investors,” Mr. Capers added.

The arrests on Monday were part of an investigation among several government agencies, including the Federal Bureau of Investigation and the United States Postal Inspection Service. In June, Murray Huberfeld, a former Platinum executive, was arrested. He has pleaded not guilty to conspiracy and wire fraud.

Soon after Mr. Huberfeld’s arrest, agents from the F.B.I. and the Postal Inspection Service raided Platinum’s New York offices. Faced with mounting pressure from federal investigators, as well as an investigation by the S.E.C., Platinum liquidated its main hedge fund.

For some at Platinum, there was already a sense late last year that government investigators were closing in on the firm. In an email exchange, Mr. Nordlicht, Mr. Landesman and an unnamed principal partner in Platinum discussed fleeing to Israel, according to prosecutors.

“Don’t forget the books,” the unnamed partner wrote. “Assume we are not coming back to ny.”


Fraud Charges Against Jail Officers’ Union Chief With a Taste for Luxury


JUNE 8, 2016

Norman Seabrook, the president of the New York City correction officers’ union, leaving Manhattan’s Federal District Court after an appearance on Wednesday. Credit Bryan R. Smith for The New York Times

As federal agents tell it, the kickback scheme that led to the arrest on Wednesday of Norman Seabrook, the powerful leader of the New York City correction officers’ union, was hatched one night in late 2013 in a hotel room in the Dominican Republic.

The union president had been drinking and was delivering an earful to a well-connected New York real estate developer, according to the agents. For too long, Mr. Seabrook complained, he had been working hard to invest the union’s money and had not received anything in return.

It was time, he said, that “Norman Seabrook got paid.”

Within months Mr. Seabrook made an investment deal that made even union lawyers uneasy, putting $20 million of union funds in a high-risk hedge fund, according to a criminal complaint filed by the office of Preet Bharara, the United States attorney for the Southern District of New York. In exchange, prosecutors said, he was given $60,000, delivered in a Salvatore Ferragamo bag — one of his favorite luxury brands.

Over the course of two decades as union president, Mr. Seabrook has gone from a jail guard patrolling the cellblocks of Rikers Island to an influential power broker, forming alliances across the political spectrum including with Gov. Andrew M. Cuomo, a Democrat; former Mayor Michael R. Bloomberg, an independent; and former Gov. George E. Pataki, a Republican.

Just looking at him, it is clear Mr. Seabrook enjoys life’s finer things. He is driven around town in luxury S.U.V.s, dines at upscale restaurants, smokes fine cigars and wears expensive tailored suits, often with a pocket square.

Indeed, after Mr. Seabrook was arrested, agents from the Federal Bureau of Investigation recovered a Ferragamo bag that matched the description of the one stuffed with cash, along with 10 pairs of Ferragamo shoes.

At least some of Mr. Seabrook’s luxuries were paid for by people seeking favors from him and the union, according to investigators. Plane trips to Las Vegas, California, Israel and at least two to the Dominican Republic were underwritten by Jona Rechnitz, the developer at the hotel that night in 2013. After that meeting, Mr. Rechnitz introduced Mr. Seabrook to a hedge fund financier named Murray Huberfeld, and helped arrange for the kickback, according to federal investigators.

Mr. Rechnitz, who has pleaded guilty and is cooperating in the Seabrook case, is also a central target in one of the investigations that are focused on the campaign fund-raising of Mayor Bill de Blasio, a Democrat. He is not named in the complaint and is referred to instead as Cooperating Witness 1 or CW-1.

Both Mr. Seabrook and Mr. Huberfeld, an associate at the hedge fund, Platinum Partners, have been charged with one count of honest services fraud and one count of conspiracy to commit honest services wire fraud. Mr. Seabrook was released on $250,000 bond and Mr. Huberfeld on $1 million bond. Both have been ordered to remain in the New York City region.

After the meeting at the hotel, according to prosecutors, Mr. Rechnitz went to Platinum promising to arrange a deal with the union to become a major investor. The catch, he said, was that Mr. Seabrook would have to be compensated. Mr. Huberfeld agreed to the arrangement and was willing to pay Mr. Seabrook 10 percent of all profits that the hedge fund made on the union’s investment. Photo

Murray Huberfeld, right, leaving court. An associate at Platinum Partners, he and Mr. Seabrook were charged with honest services fraud and conspiracy to commit honest services wire fraud. Credit Bryan R. Smith for The New York Times

Mr. Seabrook, whose salary is $300,000 a year with his union stipend, had one overarching concern, according to the complaint: how big his cut would be.

Mr. Huberfeld told him it could be as much as $150,000 a year.

In return, Mr. Seabrook would direct money intended to cover correction officers’ pensions into a high-risk fund. Up to that point the union had maintained a traditional investment portfolio made up of conventional stocks and bond funds, government obligations and a real estate trust fund.

The union’s lawyers reviewed the proposal and pointed out that the union had never invested in a hedge fund before, nor had any other New York City retirement fund that they were aware of been involved in such a risky venture. Even so, they did not stand in the way of the deal.

“The annuity fund, however, is not averse to being a trendsetter,” the lawyers wrote to Platinum in February 2014.

There were other red flags particular to Platinum. Mr. Huberfeld had been convicted of fraud in 1993 for arranging for another person to take a brokerage licensing exam on his behalf. He was fined $5,000 and sentenced to two years of probation. In a separate case, in 1998, he and a partner paid $4.6 million to settle a civil action brought by the Securities and Exchange Commission that alleged bank fraud.

At a news conference on Wednesday, Mr. Bharara said that Mr. Seabrook made his investment decisions “based not what was good for his union members but based on what was good for Norman Seabrook.”

“For a Ferragamo bag filled with cash, Seabrook allegedly sold himself and his duty to safeguard the retirement funds of his fellow correction officers,” Mr. Bharara said.

In the end, it was Mr. Seabrook who made the final decision on where the union money went. Over the years, he had consolidated absolute control over the operations of the union, often bypassing his executive board on even the most significant financial decisions.

According to the authorities, he ultimately invested $15 million from the union’s annuity fund, which is financed almost completely through annual contributions from the city, as well as another $5 million from the union’s $12 million in assets at the time. “The investment decision was made by Seabrook alone,” the union’s treasurer, Michael Maiello, told investigators.

By the end of 2014, according to the complaint, Mr. Seabrook began demanding a payout for his services. The hedge fund, however, was performing worse than expected, and Mr. Huberfeld could not immediately get his hands on the money. Instead, Mr. Rechnitz fronted his own money to pay off Mr. Seabrook with a promise from Platinum that he would be reimbursed. For accounting purposes, Mr. Rechnitz disguised the kickback as a $60,000 payment for a block of New York Knicks tickets.

On Dec. 11, 2014, Mr. Rechnitz bought the bag from a Ferragamo store in Manhattan for $820. The handoff was made a few blocks away in Mr. Seabrook’s Chevrolet Suburban, which is registered to the union.

When Mr. Rechnitz “told Seabrook how much money was in the bag, Seabrook was angry that it was not as much money as he was initially promised,” the complaint said.

After the handoff, the men went out to dinner and attended a Torah dedication ceremony at a local synagogue.

As the months went on, Platinum representatives kept pressing Mr. Seabrook to invest more union funds. According to investigators, the hedge fund was having cash flow problems and needed $44 million for investors seeking to pull out their money.

On Jan. 27, 2015, Mr. Huberfeld, speaking on a phone that federal agents had wiretapped, told an associate to press Mr. Seabrook for more money during a lunch meeting.

“I’m under some pressure,” he said, according to the complaint.

On May 19, 2015, the marketing director of Platinum sent an email to other executives noting that the meeting with Seabrook went great and that he “said he will send us more money shortly.”

But before Mr. Seabrook could transfer more money, federal agents served subpoenas on the union and Platinum. “No further investments were made,” the complaint said.

The complaint does not make clear what happened to the $20 million the union invested.

In a filing for a lawsuit brought last year by a former union official over alleged financial improprieties, he boasted that the investment had returned $475,000 in a recent three-month period. A union financial statement listed a return of just $47,529 for the same time.

The union recently mailed out ballots for an election this summer listing Mr. Seabrook as running unopposed for president. But his future is unclear.

On Wednesday, he was suspended as a correction officer, relieved of his shield and gun. He sat in a packed courtroom looking relaxed. He was dressed more modestly than usual: jeans, a collared shirt and sandals.

When asked by a reporter at the courthouse how he felt, Mr. Seabrook replied, “I feel like a million dollars.”