Platinum Partners Case Is Latest Prosecutorial Overreach

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When the U.S. attorney for the Eastern District of New York, Robert Capers, unsealed an indictment late last year against operators of a hedge fund that managed more than $1 billion dollars, he portrayed it as a straightforward fraud.

“Like a Ponzi scheme,” were the words Mr. Capers used in a press release that portrayed the founder and chief executive office of Platinum, Mark Nordlicht, as having been on the verge of fleeing to Israel.

The New York Times ran the story on its business section front, parroting the prosecutor’s line:  “a $1 billion fraud that led the firm to be operated ‘like a Ponzi scheme,’ prosecutors said. It is one of the largest such fraud cases since Bernard L. Madoff’s investment firm unraveled in 2008.”

There’s another side of this that wasn’t in the prosecutor’s press release or the initial press coverage, but that will emerge in coming months in the defense of Nordlicht and, likely, those of his colleagues who have pleaded not guilty. 

The more one looks into this, the more it looks like the Platinum Partners prosecution is just the latest in a mounting and troubling pattern of examples in which New York-area federal prosecutors and FBI agents have jailed hedge fund managers or destroyed their businesses with publicized raids — only to have the charges eventually overturned by judges or never brought at all.

A full public response to the prosecutors’ accusations hasn’t yet been mounted, but there’s plenty of material with which to work.

Start with the “like a Ponzi scheme” phase. The most important of those four words is “like.” Even prosecutors didn’t say it was a Ponzi scheme. If it had been, it would have been one of the weirdest in history. Platinum had two main funds:  Platinum Partners Credit Opportunities Master Fund, L.P. and Platinum Partners Value Arbitrage Fund, L.P. No one has suggested anything was wrong with the credit opportunities fund, which had more than half a billion dollars in assets. The prosecutorial complaints concern alleged overvaluing by Platinum of illiquid assets held by the value arbitrage fund.

Who ever heard of a Ponzi scheme operator who has one fund that’s totally legit and a second fund that’s a scheme? As unlikely as a scenario as that is, even more unlikely would be one, like this, where the operators invested huge chunks of their own money into the fund that was the supposed “scheme.” A Ponzi scheme in which the operators lost their own money in the scheme?

The only way either of the Platinum funds was anything like a Ponzi scheme is that outflowing redemptions were sometimes funded by incoming investments. But if that’s the definition of “like a Ponzi scheme,” virtually every bank and mutual fund in the country operates “like a Ponzi scheme.” When I go to the bank to withdraw cash from my checking account, the bank doesn’t have to foreclose on the homeowner it used my initial deposit to give a mortgage loan to a decade ago. It can give me dollars that the person at the next teller window just deposited. Money is fungible. As long as there are accurate records, real assets, and everyone’s being treated according to the uniform rules that they agreed to, how a financial institution sources its daily cash needs is hardly a criminal matter.

Back during the financial crisis, lots of financial firms relied on federal assistance to help address a mismatch between their daily liquidity needs and the longer-term structure of their assets. Hardly anyone went to jail or faced criminal charges. One can argue that more people should have, but it seems odd, now, to pick on Platinum and hold it to a different standard.

Likewise, the valuation of illiquid assets is frequently a topic of disagreement, controversy, and negotiation. The Platinum value arbitrage fund had energy-related assets whose value varied depending on the price of oil. At a certain point, the federal government itself starting driving down the value of Platinum’s assets by leaking that the fund was under investigation.

The idea underlying the Platinum value arbitrage fund — private equity illiquid assets in a structure with hedge fund liquidity — may have been too difficult to execute successfully even absent government interference. But having a bad investment idea, or a good idea poorly executed, doesn’t usually warrant the criminal charges and 20 years in jail that the Platinum managers are facing.

It’s not supposed to be a crime to have a money-losing hedge fund, or even one that made money for a while and then lost some.

The Capers press release said the whole situation was “perhaps best illustrated” by an email exchange between Mr. Nordlicht and his partners about whether Mr. Nordlicht should board a flight to Israel. The New York Times, in its article, characterized this as “fleeing to Israel” as “government investigators were closing in.”

The government’s use of the email to make it appear as if Mr. Nordlicht was about to skip town is indeed illustrative, though not in the way Mr. Capers intended. What it illustrates is how the government and the press can make the mundane look incriminating. Mr. Nordlicht was in the United States 20 days last year. His home is in Jerusalem. His six children were enrolled in and attending school there. He wasn’t “fleeing.” He was just living his life.


Ira Stoll is editor of and author of JFK, Conservative.