By Nate Raymond and Lawrence Delevingne
NEW YORK (Reuters) - Top executives of New York-based hedge fund manager Platinum Partners were arrested on Monday and charged with running a $1 billion fraud that federal prosecutors said became "like a Ponzi scheme" as its largest investments lost much of their value.
Led by Mark Nordlicht, Platinum was known for years for producing exceptionally high returns -- about 17 percent annually in its largest fund -- by taking an unusually aggressive approach to investing and fund management, as detailed by a Reuters Special Report in April. (http://reut.rs/1TRovwx)
Nordlicht, Platinum's founding partner and chief investment officer, was arrested at his home in New Rochelle, New York. Federal prosecutors accused him and six others of participating in a pair of schemes to defraud investors.
"The charges ... highlight the brazenness and the breadth of the defendants' lies and deceit," Brooklyn U.S. Attorney Robert Capers told reporters.
Capers added that the case was one of the largest and "most brazen" investment frauds ever and Platinum was ultimately exposed to have "no more value than a tarnished piece of cheap metal."
The U.S. Securities and Exchange Commission announced parallel charges Monday against the same executives and two Platinum entities for similar civil fraud charges.
A 48-page criminal indictment said since 2012, Nordlicht and four other defendants defrauded investors by overvaluing illiquid assets held by its flagship Platinum Partners Value Arbitrage funds, mostly troubled energy-related investments.
This caused a "severe liquidity crisis" that Platinum at first tried to remedy through high-interest loans between its funds before selectively paying some investors ahead of others, the indictment said.
"So to some extent, there is a Ponzi-esque aspect to this scheme," Capers said.
FLEEING TO ISRAEL
Founded in 2003, Platinum until this year had more than $1.7 billion under management, with more than 600 investors, authorities said.
Some of those investors came from the same New York-area Jewish community as Nordlicht and other Platinum executives. They have included a charitable trust set up by day-trading pioneer Aaron Elbogen; the Century 21 Associates Foundation, led by department store executive Raymond Gindi; and the SFF Foundation, a non-profit controlled by the Schron family, known for its real estate investments.
Avi Schron declined to comment; Gindi and Elbogen did not immediately respond to requests for comment.
The indictment describes how angry investors sought to take their money out in late 2015 and early 2016 as Platinum hinted to clients that some assets were in trouble. It also cites emails between Nordlicht and another unnamed executive in which the men discussed fleeing to Israel as pressure on the firm mounted.
Prosecutors said David Levy, Platinum's co-chief investment officer, and Uri Landesman, the former president of the firm's signature fund, also participated in the scheme, which prosecutors said allowed Platinum to extract more than $100 million in fees based on inflated asset values.
Nordlicht, Levy and Jeffrey Shulse, former chief executive officer of Platinum's majority-owned Black Elk Energy Offshore Operations LLC [BLCELB.UL], also schemed to defraud bondholders of Black Elk, a now-defunct Texas energy company, out of $50 million, prosecutors said.
The indictment said the scheme involved using a group of reinsurance companies called Beechwood, partially controlled by Platinum's principals, to rig a bond vote and pay the hedge fund manager ahead of creditors.
Nordlicht, appearing in court in a checkered shirt and blue jeans, pleaded not guilty to charges including securities fraud and was granted bail by U.S. Magistrate Judge Lois Bloom on a $5 million bond secured by $500,000 cash. Levy and Landesman also pleaded not guilty Monday.
A representative for Beechwood and Shulse, who was taken into custody in Houston, did not respond to requests for comment. A Platinum spokesman declined to comment.
This year, a series of investigations tied to Platinum came to a head. The firm hired an independent monitor in July to unwind its funds, and a Cayman Islands court in August placed its main offshore funds into liquidation.
Those moves came after the June arrest of Murray Huberfeld, a longtime Platinum associate, on charges in Manhattan federal court that he orchestrated a bribe to the head of the New York City prison guards' union, Norman Seabrook, to secure a $20 million investment with the firm.
Seabrook pleaded not guilty, as did Huberfeld who was also arrested.
Two weeks later, the Federal Bureau of Investigation and U.S. Postal Inspection Service raided Platinum's Manhattan offices in a separate fraud investigation that culminated in Monday's indictment.
Others indicted on Monday include Joseph SanFilippo, Value Arbitrage's former chief financial officer; Joseph Mann, a former Platinum marketing employee; and Daniel Small, a Platinum managing director. The three men also pleaded not guilty.
The U.S. Securities and Exchange Commission said on Monday that it was seeking a court-appointed receiver for funds managed by Platinum Credit Management, the firm's second-largest vehicle after Value Arbitrage.
The case is U.S. v. Nordlicht et al, U.S. District Court, Eastern District of New York, No. 16-cr-640.