Considerations for Investors in Platinum Partners

With the Securities and Exchange Commission (“SEC”) and the US Attorney’s formal charges now filed for conspiracy and securities fraud of approximately $1 billion against the Platinum Partners and Black Elk wrongdoers, investors are looking for answers. Investors need to know whether their particular interests are aligned with the interests of other investors and where they diverge. For example, the false valuations provided to investors appear to be a common thread while there are indications that the interests of certain investors were put head of other investors.

SEC ANSWERS SOME QUESTIONS BUT DOESN’T ADDRESS OTHERS

Many answers regarding the collective interests of investors will unfold through SEC actions, including the SEC’s request for a court-appointed receiver for the funds managed by Platinum Credit Management. In contrast, answers relating to unique situations of individual investors are more likely to come through private representation of those uniquely situated investors. The unique issues may involve issues flowing from the promotion, support, marketing, and fraudulent concealment of Platinum Partner related investments and debt instruments (which we refer to as gatekeeper liability); clawback issues (i.e., when investors are required by law to return money they received from the investment); unique pension and retirement fund issues; SIPC issues;1 and other issues unique to certain classes of investors in problem hedge funds and Ponzi schemes.

UNFORTUNATELY, THIS CASE MAY TAKE SIGNIFICANT TIME

Hedge funds that drift into Ponzi schemes, as may be the case here, are often complex and slow to unravel. And, in this case, the $1 billion dollar investment size of the Platinum Partners’ operation — as well as the involvement of a bankruptcy and liquidation process, including a Cayman Islands Court — creates additional complexities for the Court action in New York and the federal government. This likely means this situation will take significant time to unravel.

According to the government, among other wrongs, a Beechwood group of re-insurance companies was used as part of a scheme to rig a bond vote, pay the hedge fund manager ahead of creditors, and divert almost $100 million from one of Platinum’s’ oil operations to boost other Platinum funds. With respect to the scheme to rig the bond vote, noteholders (investors) had priority over preferred shares, and Platinum’s management and its affiliates were prohibited from participating in any vote among noteholders to change this priority. However, the vote was alleged to be rigged by secretly transferring a large block of notes to related entities controlled by Platinum, which then voted in favor of Platinum’s position to quash the wishes of the real note holders.

SCHEME WAS EXPOSED FOR INABILITY TO DEAL WITH LIQUIDITY

From the perspective of Vernon Litigation Group’s experience in representing hedge fund and Ponzi scheme investors over the years, the current scheme was exposed for the same reason most widespread scams are exposed: An inability to deal with a liquidity issue. Illiquidity problems often lead the fraud operator to attempt to manage the crisis through disparate treatment of investors in an effort to keep a lid on the scam and manage through it without being discovered. As is typical in cases like this, it appears that the alleged fraudsters overstated the value of an oil company (that was among their largest assets), and concealed a growing liquidity crisis by improperly transferring money between funds, making preferential redemptions to favored or suspicious investors, and using misrepresentations to attract new investors to the struggling funds during what internal documents allegedly described as “Hail Mary time.”

The above was clearly summed up by the SEC’s Enforcement Director: “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.” To the SEC’s credit, this government action apparently resulted from the work of SEC examiners who uncovered suspicious activity during an examination of Platinum Partners.

As mentioned earlier, the SEC is seeking a court-appointed receiver over funds managed by Platinum Credit Management and other Platinum-related entities. Funds managed by Platinum Management are currently in a liquidation proceeding in the Cayman Islands.

The Vernon Litigation Group is a Naples, Florida-based law firm representing clients in courtroom litigation, mediations, and arbitrations throughout the United States. Lawyers at the Vernon Litigation Group also testify on behalf of investors as experts and work for Receivers to assist investors. Vernon Litigation Group has, for the last 5 successive years, been named as one of The Best Law Firms by US News and World Report. The attorneys of Vernon Litigation Group are experienced in cases involving receiverships, pension funds, Ponzi schemes, hedge funds, energy sector products, note schemes, and other cases involving investment and securities issues. Lawyers with the Vernon Litigation Group have also represented many investors swindled in a Naples, Florida-based hedge fund scheme in which investors around the country lost close to $60 million. The architect of the scheme was later convicted in federal court of fraud and money laundering and sentenced to serve 17 years in federal prison. Additionally, lawyers with The Vernon Litigation Group obtained a $4.3 million JAMS arbitration award for a single hedge fund investor in a case that involved investments in multi-strategy hedge funds sold and managed by a multi-family office, which managed billions of dollars of client investments.

CONTACT OUR OFFICES WITH ANY QUESTIONS

If you have any questions regarding your investment or loans to any Platinum Partners or Black Elk related fund or have any information which would assist with the investigation of this scheme, please contact Vernon Litigation Group on a fully confidential basis by calling toll-free at (239) 319-4434 or by e-mailing at info@vernonlitigation.com.

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