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SEC Files Complaint Against Platinum Funds for Defrauding Investors

The Securities and Exchange Commission has filed a complaint against Platinum Management LLC, Platinum Credit Management, L.P, Mark Nordlitch, David Levy, Daniel Small, Uri Landesman, Joseph Mann, Joseph Sanfilippo and Jeffery Shulse (all collectively “Defendants”).  The complaint alleges that the defendants initiated multi-pronged scheme to defraud investors. The scheme was led by Platinum Partners, Platinum Credit, the managers of hedge funds PlTINUM Partners Value Arbitrage Fund L.P. (“PPVA”) and platinum Credit Opportunitiues Master fund (“PPCO”).  These funds were led by Nordlitch.

For years Platinum Management allegedly covered up a liquidity crisis to both new and existing clients.  The did this by reporting steady returns that averaged 17% from 2003-15.  It also allowed its investors to redeem with a 60 or 90-day redemption request.  This guarantee was one of the ways it found and keep investors.

Behind closed doors, there was different scene unfolding.  PPVA was under growing pressure and  PPVA was running out of cash.  The cash was needed to fulfill the promise of liquidity and pay investor redemptions.  The defendant’s solution to the crisis of illiquidity was to gain new investors.  Documents obtained by the SEC are filled with notes discussing “Hail Mary time”  and the need for new subscriptions.  They discuss the daunting and relentless task of fulfilling the guarantee.  Nordlitch discusses the possibility of having to wind down operations.

The defendants concocted a number of schemes to pay redemptions in an attempt to find investors and save the fund.  PPVA allegedly overvalued it stake in an oil production company, Golden Gate Oil, LLC (“Golden Gate”).  PPVA valued their stake in Golden Gate at 170 million.  In fact, the position PPVA held in Golden Gate was only a fraction of that amount.  PPVA did eventually purchase all of Golden Gate, but only paid 3.2 million for 52% of the company.  Yet, it was still proclaiming a value of 170 million for Golden Gate.

In another scheme to save PPVA the defendants allegedly concocted a plan to syphon money from  Black Elk Energy Offshore Operations LLC “(Black Elk”).  Platinum schemed to divert 100 million dollars from an asset sale from Black Elk to PPVA.  Unfortunately for PPVA (which dominated Black Elk’s management), it did not have voting right for Black Elk’s Preferred shares.  So, how were they going to get this 100 million dollars into the coffers of PPVA?  They allegedly conspired amongst themselves to gain voting shares through the use of two other companies, B asset Manager and B Asset Manager II, (Collectively known as BAM).  After they gained control of Black Elk, they directed Shulse to transfer 100 million dollars from Black Elk to PPVA.

They also allegedly borrowed money at a very high interest rate to keep the fund afloat, and lied to PPVA’s auditor regarding the reason for the loans.  They allegedly pressed investors to cancel or defer redemption requests while they simultaneously launched a drive for new investors and new money.  They did this while concealing PPVA’s true liquidity crisis from investors, new and old.  PPVA allegedly transferred money from the various funds it controlled to plug the liquidity holes as  they popped up.  Eventually they put the majority of the assets in a “side pocket”.  This enabled them to stop paying redemptions for 3 years.

So, we have another case of directors of a company that found it financial trouble using any means necessary to cover its financial losses.  In the process they have violated the Securities Act of 1933.

If you want to read more about this case, then click on the following link: https://www.sec.gov/litigation/complaints/2016/comp-pr2016-267.pdf.  This case provides a good example of the need for investors to research the companies in which and through which they are investing.  It also highlights the fiduciary duties and obligations owed to investors.  If you have any questions about the legal issues raised by this case in connection with your own activities, then please contact Tomlinson & Shapiro at (312) 715-8770.

This post was written by Michael Tomlinson

Michael Shapiro
(312) 715-8770
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