Platinum Partners’ Executives Charged With $1 Billion Securities Fraud
From Reuters
By Nate Raymond and Lawrence Delevingne | NEW YORK
Top executives of New York-based hedge fund manager Platinum Partners were arrested on Monday and charged with running an approximately $1 billion fraud that federal prosecutors said became "like a Ponzi scheme" as its largest investments lost much of their value.
Mark Nordlicht, Platinum's founding partner and chief investment officer, was arrested at his New Rochelle, New York, as federal prosecutors in Brooklyn accused him and six others of participating in a pair of schemes to defraud investors.
U.S. Attorney for the Eastern District of New York Robert Capers speaks to media to announce the unsealing of an indictment charging Mark Nordlicht, the Founder and Chief Investment Officer of Platinum Partners and six other individuals with securities fraud, investment adviser fraud and conspiracy in an approximately $1 billion fraud in Brooklyn, New York City, U.S., December 19, 2016. REUTERS/Andrew Kelly
"The charges relating to these two schemes highlight the brazenness and the breadth of the defendants' lies and deceit," Brooklyn U.S. Attorney Robert Capers told reporters.
Led by Nordlicht, Platinum, the subject of a Reuters Special Report in April, was known for years for producing exceptionally high returns by taking an usually aggressive approach to investing and fund management. (reut.rs/2h36duU) (reut.rs/1TRovwx)
But a 48-page indictment said since 2012, Nordlicht and four other defendants defrauded investors by overvaluing illiquid assets held by its flagship Platinum Partners Value Arbitrage Fund LP, mostly troubled energy-related investments.
[Soren K.- Note the charted comments below and the accompanying earnings during crudes fall]
MarketSlant Sources: Shale Failed, But Earnings did not Reflect it
MarketSlant
Platinum Partners were a client of one of our writers when they were implicated in the Optionable, BMO scandal in 2007. None of the WSJ reporting below was in our purview. But we are not surprised considering our past experiences with some of the personnel. It is sad and reinforces the worst in what people think of financial managers as well as the community of ethical people to which we and sadly they belong.The managed earnings, however, were an alarm bell for years. And that is why, despite PPVA's returns, they could not get "front door" investors.
There is a lot of industry lingo here. We will follow up with subsequent articles. for now, we ask your patience adn ability to google arcane terms!- TX
Manipulated Balance Sheet
As material witnesses in that 2012 case, we were reticent to discuss the new situation despite being contacted by Reuters and Bloomberg writers who we respected. We could not add anything material to the investigations. Just what we suspected- revenues were managed. Earnings were held back, and we noticed it with our own contributions.
Our Experience
Attached at bottom is the proprietary trade idea and description that netted them $80+ million in 2 years. What did not make sense and what we were not privy to until recently was the fact that the firm did not show the profits when they incurred. They chose to save them for a rainy day.
Point being, if a firm holds back earnings for fear of scaring investors (a quote form an executive there), they are also likely to holdback loses to smooth out as well. In the end, the telegraph of this can often be seen in the perfect 45 degree slope of earnings. They simply do not exist in nature with such smoothness.
You know, it was very simple really. Bernie Madoff's performance chart showed an upward slope at a 45-degree angle. Now, a 45-degree angle is not something we deal with in finance. It's something you see in a high school geometry class. Performance like that has never been recorded in human history.- Harry Markopolos, the Madoff Whistleblower
As the wiseman said: Show me a 45 degree angle, and I will show you fraud.
The reason we can't show this trade as a home run is because it will scare investors. So we will put it in over time. otherwise they will think we are loose cannons.- PPVA Executive, 2008
- Soren K. Group
Cover page of their 2016 Offering to replace lost capital from fleeing investors and Shale Losses
- A spike in 2006-2008 ROR that (still) under-reported earnings.
- Then a smooth 45 degree curve as losses were balanced with held back gains.
- Then the kiting of loans back and forth in 2016 to hide real losses in shale, notice the flat returns- never negative
"I'm sorry, we have to hold back your company's earnings, a new partner is being underpaid."- PPVA Exec, 2007
When is a loss not a loss?
Regulators asked the wrong questions then. With regard to PPVA's ownership of the brokerage firm OPBL, the fraud was in not disclosing related party income. If CiSEnergy was invested in by PPVA, and CIS energy was a client of OPBL, then OPBL ahd to report that income as "related party". Not reporting it overstated the PE of the company. Instead, they focused on settlements, and spheres of influence. In one instance, a plaintiff firm's lawyer thought attacking the reputation of a material witness was the better tact than actually looking at the 10-ks.
This time they asked the right questions.
Top executives of hedge fund Platinum Partners were arrested Monday morning and will be charged with defrauding investors in one of the biggest such cases since Bernard L. Madoff’s Ponzi scheme.
Via the WSJ: Rob Copeland, Erica Orden and Rebecca Davis O’Brien
As recently as this fall, Platinum told investors it oversaw more than $1 billion scattered in eclectic investments like loans to bankrupt companies and thinly-traded pharmaceutical stocks. It boasted one of the steadiest performance track records in the hedge-fund industry, with no down years for its funds.
The indictment unsealed Monday in federal court in Brooklyn charges Platinum founder and Chief Investment Officer Mark Nordlicht, co-chief investment officer David Levy, and former president Uri Landesman with counts of securities fraud, investment adviser fraud and conspiracy.
Authorities said they and others erroneously inflated the value of Platinum’s assets, allowing the firm to collect a hefty cut of all investment gains and project a veneer of financial stability. In actuality, the firm’s investments were worth far less, and Platinum’s executives knowingly faked the performance figures, authorities said.
A spokesman for Platinum declined to comment, and lawyers for those charged couldn’t immediately be reached for comment. The firm had earlier said it was cooperating with all investigations, following reports that it was being probed by the Securities and Exchange Commission and Justice Department.
Platinum’s investors were focused in the observant Jewish community, people familiar with the matter said.
The fund told them and others earlier this year it planned to liquidate its hedge funds, but couldn’t immediately pay back their money because of a paucity of easy-to-sell assets. Later, its flagship fund filed for bankruptcy protection, and Cayman Island liquidators working to unwind the troubled fund said they were trying to stave off collapse.
Separately, Platinum co-founder Murray H. Huberfeld was arrested this year in connection with an alleged scheme to bribe a union leader to funnel $20 million to Platinum, charges he denies.
Mr. Huberfeld wasn’t named in Monday’s indictment, but a person familiar with the matter said he was the anonymous “Co-Conspirator 1” in the document. His nephew, Mr. Levy, is one of the Platinum executives arrested Monday.
In December 2015, Messrs. Huberfeld and Nordlicht discussed fleeing the U.S. for Israel, according to the indictment.
“Don’t forget books,” Mr. Huberfeld wrote to his partner in an email, the indictment says. “Assume we are not coming back to ny…Take passport.”
The two didn’t move permanently in the end, people familiar with the matter said. They remained in the U.S. and continued to tell investors they were sanguine about Platinum’s financial health.
The 2006- 2008 Trade that started the "Good Problem", and ended with the Shale Assets marked to myth in 2014
The result was scandal at PPVA and OPBL. NMX had bought a piece of OPBL. All because a rogue trader at BMO was mismarking his books as counterparty to this idea. So OPBL, NMX, BMO, and PPVA locked horns.
EOO Arbitrage Summary- The following is the original trade idea as presented and executed in 2007.
The Concept:The Trade is based on a disparity between the conventional wisdom in current option modeling and statistical reality. In essence it is a function of current option models being incorrect in their assessment of the differences between American style options and their European counterparts as they relate to Early Exercise premium.It exists for several reasons:Commonly used option models do not account for the correlation factor and term structure in underlying commodity movement. They do not have a coefficient for other futures as related to the spot month.Their valuation of Early Exercise premium does not properly handicap liquidity gaps, leptokurtosis, jump diffusion and skew for options.The correlation between interest rates and Early Exercise probability should not be the most important determinant of premium in Commodity Options.
Early Exercise Defined:Early Exercise is a function of Variation Margin in the Commodity markets. Variation Margin is a lending process that results from a trader’s inability to cross margin option profits with future’s losses as long as the option position exists.Except for infrastructure and systemic risk, there is no material risk to the trader or his Prime Broker, but that Prime Broker may charge a fee for lending a trader’s own profits back to him for margining purposes. This phenomenon is tied to regulations in the industry.Early Exercise Conditions:An option is considered eligible for early exercise when all of the following criteria are met:1-The in-the-money (ITM) option trades at parity with the future (100 delta)2-The value of the equivalent out-of-the-money (OTM) option is less than the cost of borrowing on the ITM option3-The theta of the OTM option is less than the cost of carry per day on the ITM option.There is liquidity in the corresponding OTM optionIf any of these 4 conditions are not met, then it will not save money to exercise the ITM option. Consequently, assuming the other side of the trade borrows money at the same or better rate, any option exercised early not meeting the requirements above will be a profit for him.The Trade:A sale of the American style option and a buy of the European equivalent. It is a neutral trade from a volatility and directional perspective.The Risks:
Risks are minimal at the option level but potentially large at the systemic level.The main risk is Early Exercise.
●Early Exercise is a function of interest rates, direction, volatility and liquidity.
●Interest rates- as these rise, money is lost in opportunity cost.Early Exercise probability change is little to noneAs the market moves away from strikes, their chance of Early Exercise increases.
●Volatility- As volatility decreases, the chance of Early Exercise increases.
●Liquidity- as liquidity in options with a less than 3 delta increases, the chances of Early Exercise increases.
Other factors
●Strike Selection- little understood but very important, it is a function of leptokurtosis, Skew and mean regression as they relate to option liquidity.
●Diversification of Open Interest- the less counterparties there are on the trade, the more likely an “All or None” scenario for Early Exercise. Therefore, volatility of Early Exercise increases as number of counterparties decreases.
Profitable Exit:Exiting profitably is dependent on several factors.1-Familiarity with the marketplace and its universe of counterparties2-Familiarity with the nuances of the underlying commodity and its term structure3-Option Risk management; A thorough statistical understanding of Early Exercise risk.
Good Luck
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