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Platinum Partners’ Securities Fraud Convictions Upheld

The judge in the case had stunned prosecutors and the defense team by overriding guilty verdicts. Now a federal appeals court has reinstated the original convictions.

What had been a huge upset in the world of white-collar criminal prosecutions was undone Friday when an appeals court restored the securities fraud convictions of two Platinum Partners executives: founder Mark Nordlicht and co-chief investment officer David Levy.

In 2019, both men were convicted after a trial of nearly three months, but Brooklyn federal judge Brian Cogan stunned prosecutors as well as the entire white-collar defense bar by overturning their convictions.

Prosecutors quickly appealed, arguing that the judge had overstepped his authority and “usurped the role of the jury by imposing [his] own view of the evidence.”

The appellate court agreed. In a monster 104-page decision, U.S. Circuit Judge Robert Sack wrote that neither an acquittal nor new trial was warranted because there was enough evidence for a “rational jury” to find the men guilty.

Going to such lengths to review the evidence in a case is unusual, said Christopher Nasson, a former prosecutor who is now a partner at K&L Gates. He thinks the appellate judges “wanted to make it clear that this was not a close call.” He called their opinion a “polite rebuke” of Cogan and said it suggests they thought he was “way off base.”

The demise of Platinum Partners began in 2012, when its main hedge fund encountered serious problems. The firm was soon facing angry investors who wanted their money back — money Platinum did not have. 

By 2016, these problems had led several investors to file whistleblower complaints to the Securities and Exchange Commission, and bondholders in an oil company Platinum controlled had sued the hedge fund firm. To top it off, another of the fund’s founders, Murray Huberfeld, was charged that June with a kickback scheme in which he had paid $60,000 in bribes to the president of the New York City corrections officers union in exchange for a $20 million union investment in Platinum — money Platinum desperately needed to meet a rising tide of redemptions. 

Less than a week after Huberfeld’s arrest, the former $1.8 billion Platinum announced it would go into liquidation, and six months later an eight-count indictment against seven individuals connected with the hedge fund was filed in federal court. 

When the U.S. attorney for the Eastern District of New York, Robert Capers, unveiled the charges on December 19, 2016, he accused Platinum insiders of running a $1 billion “Ponzi-like scheme,” masterminded by Nordlicht, that defrauded Platinum’s investors by using loans and new investor funds to pay off existing investors.

Capers said the Platinum executives pulled off the scheme by “falsely claiming that their flagship hedge fund was thriving when in fact it was not, and by overvaluing its assets when in reality the assets were doomed and the fund was a sinking ship.” 

Nordlicht and three others were also charged with rigging a vote to change the bond covenants of Black Elk Energy, Platinum’s biggest investment, to extract millions of dollars from the company. 

Three of the men who went to trial— Nordlicht, Levy, and CFO Joseph SanFilippo — were found not guilty of the “Ponzi-like” investment fraud. 

Nordlicht and Levy were convicted in the alleged bond-rigging scheme, but SanFilippo was not.

But the upset occurred when, in short order, Cogan threw out Levy’s conviction and ordered a new trial for Nordlicht. 

While Cogan’s ruling was shocking, as Institutional Investor previously reported, he had sent out clear signals during the trial that, as one whistleblower put it, “he just did not want to send these guys away.”

“I’m possibly having some issues with the government’s case,” Cogan said just six days into the trial. “First of all, I don’t think there's anything illegal about a hedge fund or any business preferring its favorite customers over other customers. It’s like every business that gets into trouble.” 

Cogan continued to be cross with prosecutors as the case wore on. He belittled and dismissed their witnesses, at one point threatened to call a mistrial, and eventually told jurors to disregard key elements of the government’s case.

The judge also tipped his hand in one sidebar discussion with prosecutors.  

“There’s policy ramifications from this case . . . because you’re actually saying they should have stopped and gone into liquidation at a much earlier state than they did,” he told a stunned Assistant U.S. Attorney Lauren Elbert, who at the time was explaining that the Platinum executives were trying to get new investors “after the point that the liquidity crisis was severe and they couldn't pay redemptions without disclosing those facts.”

Cogan seemed more concerned about what might happen to Platinum if it didn’t get new investors: “We do want to encourage qualified investors to take risks with qualified hedge funds,” he said. “We don’t want to drive anybody out of business too early; that just hurts everybody — including the kinds of innovations that hedge funds back.”

Now the case will go back to his court, for reinstatement of the conviction and sentencing. But the drama is unlikely to end there. A member of Nordlicht’s defense team told II that it plans to petition for rehearing in the second circuit appeals court parallel with an en banc review. Separately, it will ask for a new trial based on new evidence.

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