In the years before Mark Nordlicht was arrested for what's alleged to be one of the biggest investment frauds since Bernie Madoff's, U.S. authorities had plenty of reasons to suspect something might have been fishy about his hedge fund, Platinum Partners.
As far back as 2007, Bank of Montreal accused Nordlicht of helping a rogue trader, costing it more than $500 million. Three years later, when the Securities and Exchange Commission was investigating what it called a "scheme to profit from the imminent deaths of terminally ill patients," the agency discovered that Platinum had funded the deals. And in 2011, a Florida lawyer who confessed to running a $1.2 billion Ponzi scheme testified that Nordlicht, his biggest funder, lied to help him lure new investors.
And then there were the remarkable profits: 17 percent annually on average from 2003 through 2015, with no down years. The returns were almost as smooth as the fake gains that Madoff claimed year after year, as measured by a popular metric called the Sharpe ratio.
But until Murray Huberfeld, who founded Platinum with Nordlicht, was caught up in a New York City municipal-corruption probe in June, no one at the fund had been charged with wrongdoing. Within weeks of Huberfeld's arrest, federal agents raided Platinum's midtown Manhattan office. On Dec. 19, Nordlicht and six others were arrested in what the government called a $1 billion fraud. Nordlicht and Huberfeld have pleaded not guilty, and Platinum's main fund is being wound down after filing for bankruptcy. Montieth Illingworth, a spokesman for Platinum, declined to comment.
Smooth returns
That Platinum was able to avoid scrutiny for so long illustrates flaws in the post-Madoff regulatory regime. While the SEC says it now conducts "risk-based examinations" of funds that have suspiciously smooth returns, the agency didn't do a thorough on-site audit of Platinum until 2015, according to a person with knowledge of the matter. Judy Burns, an SEC spokeswoman, declined to comment.
"The returns alone make no sense," said Joelle Scott, who investigates money managers as senior vice president at Corporate Resolutions Inc. in New York. "This isn't a Madoff thing where it was hard to find. This was a glaring, documented history of bad behavior."
The fund's presentations for investors touted its top-tier auditors and "independent valuations" by an experienced consultant. But those gatekeepers relied on Platinum to provide information about its investments. The valuation consultant says the firm never visited the California oil fields that supposedly accounted for much of Platinum's assets. Even a simple check of public records would have revealed they were barely producing oil.
Nordlicht, 48, a second-generation commodities trader, started Platinum in 2003 with seed money from Huberfeld, a penny-stock trader from Brooklyn whose family owned a chain of kosher fast-food restaurants. Nordlicht, who has the rumpled look of a professor, was the face of the fund. Huberfeld, 56, who had been sanctioned three times for alleged securities-law violations, stayed in the background.
Little known on Wall Street, Nordlicht and Huberfeld cultivated connections in New York's Orthodox Jewish community. Among the investors they recruited were the Gindi family, owners of the Century 21 department-store chain, and real estate moguls Ruby Schron and Abraham Fruchthandler. The Gindis, Schron and Fruchthandler declined to comment.
"You win some, you lose some," said another investor, Gordon Diamond, a meat magnate who served on the board of a Holocaust charity with Huberfeld. "I guess I should have done more due diligence."
Platinum gains
Platinum's first close call came in 2007, when Bank of Montreal discovered that a natural gas trader had been covering up huge bets, many of them with the hedge fund. The bank was forced to liquidate the trades, resulting in big gains for Platinum, among others, according to Vince Lanci, who handled some of the bets as an independent trader and managed money for the fund.
The problem was that Platinum's Nordlicht was also chairman of Optionable Inc., a brokerage that, according to prosecutors, provided price quotes to the rogue trader. Bank of Montreal sued Nordlicht, saying he helped devise the trades. Nordlicht denied knowing anything about the fraud, and the case was settled out of court.
The FBI investigated, arrested the rogue trader and charged the chief executive officer of Optionable with aiding the scheme. Both men pleaded guilty. Nordlicht wasn't accused of wrongdoing by the government. When the Optionable CEO was released from prison in 2014, he went to work for a company controlled by Platinum.
The trades with Bank of Montreal helped Platinum record a 53 percent gain in 2007. That attracted investors, and its main fund's assets more than doubled to $567 million by the end of the year.
Ostrich boots
Nordlicht needed to put that money to work. That's when he found Scott Rothstein, a Florida lawyer who was promising huge returns to investors who would advance him funds against future payments from legal settlements. Rothstein's wild spending had turned him into a Gatsby-like figure on the Fort Lauderdale charity circuit. Short and stocky, he wore pinstriped suits, loud hand-painted ties and orange ostrich boots.
Platinum and related funds advanced him more than $100 million through a feeder fund at an annual interest rate of 50 percent. Rothstein would later say that was so high his investors should have known something was wrong. In 2009, he missed a payment. Nordlicht flew to Florida for a meeting, which Rothstein described in a deposition two years later, after he pleaded guilty to the fraud.
The two men sat facing each other on a couch in his office. Rothstein said in his deposition that he wasn't sure if Nordlicht knew that the lawsuits and settlements didn't really exist. "If we go down, you go down," Rothstein recalled saying. "We're in this together."
Rothstein said Nordlicht told him his father had been investigated for fraud and that he didn't want to relive the experience. He talked about the situation with Bank of Montreal.
"He was trying to explain to me without using the words that he was a player, that he got it," Rothstein said. "He said these things only blow up when the parties start fighting."
