Fraud probe hits hedge fund tied to Jewish community

Intimate ties and fundraising inside a close-knit world of observant Jewish businesspeople in New York, Florida and Israel are central to the $ 1.25 billion hedge fund firm Huberfeld has helped lead, Platinum Partners. Now those ties are being tested as two sets of federal prosecutors as well as securities regulators delve into Platinum’s operations.

In early June, Huberfeld was arrested in connection with an alleged scheme to bribe a union leader to funnel $ 20 million to Platinum. Later in June, federal agents raided Platinum’s New York offices.

An issue for investigators now, according to those familiar with their probe, isn’t just alleged bribery but the integrity of Platinum itself: It is also a fraud investigation.

Platinum has recorded some of the most impressive numbers in the hedge fund world, double-digit average annual returns for over a decade.

Beginning around 2012, however, with some investors wanting their money back, Platinum began borrowing heavily. According to documents reviewed by The Wall Street Journal and people familiar with the firm, Platinum borrowed hundreds of millions of dollars, some of it at double-digit interest rates.

In one instance, it paid interest to a lender part-owned by family-member trusts of Huberfeld and Mark Nordlicht, Platinum’s founder and chief investment officer.

In June, Platinum suspended redemptions from its flagship fund and stopped giving performance updates. It moved to liquidate the fund and discussed plans to repay investors but didn’t commit to giving to them cash matching the full investment gains the firm has reported. Last week, Platinum said it would also liquidate the rest of the firm.

Investigators now are looking into whether, before the suspension, Platinum had been paying some reported investment gains to exiting investors with money from incoming ones, according to people familiar with the probe.

They also are scrutinising the firm’s service providers, including auditors who certified its figures.

Platinum has invested in exotic assets that can be hard to value, such as loans to struggling companies and annuities linked to ill patients’ lives. Among questions investigators seek to answer is whether Platinum misstated values of some holdings, the people familiar with the probe said.

Platinum spokesman Montieth Illingworth defended the firm’s auditing and valuation methods and said it stands behind its performance record.

On specific investigative points, he said, “It is incorrect to imply that past payouts to investors were specifically made with new allocations”.

He also said money wasn’t borrowed to meet redemptions. “Past redemptions were paid out of cash gains from the positions we invested in,” Illingworth said.

Platinum said it expects to begin repaying investors in 2017. A person close to the firm said it hopes eventually to pay back all $ 1.25 billion, or more, with further investment gains.

Under investigation in addition to the firm are Nordlicht, said people familiar with the probe. The spokesman said they are cooperating with investigations. No one other than Huberfeld has been accused of wrongdoing.

On Friday, July 22 Huberfeld pleaded not guilty to conspiracy and wire fraud in the alleged union bribery. The ex-president of New York’s Correction Officers’ Benevolent Association, Norman Seabrook, also pleaded not guilty in the matter.

In an interview, Huberfeld wouldn’t discuss that case or go into detail about Platinum, where he said he has given up his ownership stake. “I tried as best as I could and I think it was run successfully,” he said.

Among investors in Platinum is Sol Werdiger, a clothing magnate who is prominent in the New York Orthodox Jewish community to which the hedge fund firm has looked for investors. “I know very, very little about the inner workings” of the firm, said Werdiger. He said he was concerned about the safety of his investment.

This account of Platinum’s affairs is based on audits and other documents reviewed by The Wall Street Journal and interviews with more than a dozen current and former investors and employees of Platinum, as well as others familiar with the investigation.

Huberfeld and Nordlicht blazed unconventional paths in the hedge fund world.

Huberfeld, the 55-year-old son of a kosher restaurateur in the working-class Brooklyn neighborhood of Canarsie, traded penny stocks privately for years. In 1992 he pleaded guilty to a misdemeanour after sending an imposter to take a brokerage-license exam on his behalf, drawing a $ 50,000 fine.

In 2003, he and others helped stake Nordlicht with $ 25 million to start Platinum. Two years later Huberfeld started his own hedge fund, initially called Centurion and owned mostly by Nordlicht, which specialised in making loans to companies that found it hard to borrow.

Nordlicht 48, is a second-generation commodities-options trader who once had a seat on the New York Mercantile Exchange. Where Huberfeld is known for his wide collection of $ 1,200 navy suits, Nordlicht is more likely to be seen in a casual outfit of fleece and slacks. For years he drove a Ford Flex.

While running their own funds in Carnegie Hall Tower in Midtown Manhattan, the two frequently spent time in each other’s offices and had apartments in the same Upper West Side building. In 2011, Nordlicht’s Platinum took over operations of Huberfeld’s fund, though Huberfeld continued to be involved in the business.

Seeking investors, the firm tapped a network of Jewish day schools and wealthy Jewish philanthropists with shared charitable interests. “We were raising a fund,” Huberfeld said. “These were the people we knew.”

Platinum could point to one of the best records in the hedge fund business. Its flagship Value Arbitrage fund, which takes debt and equity positions in hard-hit companies, has reported an average annual return of 17.2% from its inception through April.

The fund started by Huberfeld, now called Credit Opportunities, has had an average annual return of 13.2%.

Neither has ever had a down year, and the credit fund has had only one losing month in its nearly 11 years.

In pitching that fund, Huberfeld would pull out a sheet of performance figures and point to the sole down month. “You see? We lose,” he said, according to one investor. “You see? We’re real.”

Huberfeld sometimes took investors on a Gulfstream III jet and hobnobbed with them during a celebration of Talmudic study at MetLife Stadium and New York Knicks games. Most years at Sukkot, an annual fall holiday, he set up shop in the presidential suite at Jerusalem’s five-star David Citadel hotel and hosted a party.

The Sukkot parties weren’t strictly fund-raising events, Huberfeld said. “Were some of the people investors? Possibly one, two or three. But a handful at best,” he said.

“Murray was known in the Jewish community as someone to have means,” said a friend of his. “If you have a wallet, people perceive you to be a genius.”

The outreach dates to as early as 2005, when Huberfeld made his credit fund known to fellow philanthropists during a trip to the Vatican to meet the pope. The trip was organised by the Simon Weisenthal Center, a nonprofit focused on anti-Semitism, where Huberfeld was a board member and donor. At least one person on the trip invested.

“Several people met him through the center, but we had no idea” of the details of the investments, said Rabbi Marvin Hier, the Weisenthal Center’s founder, who led the trip. Huberfeld resigned from the center’s board last month.

Another investment source was Touro College, a Jewish-oriented New York college whose board of overseers Huberfeld joined in 2003. It invested endowment funds with Huberfeld’s fund in 2008 and received its investment back in 2011. Touro’s chief financial officer, Melvin Ness, said there was no correlation between Huberfeld’s listing on the Board of Overseers and Touro’s investment in the fund.

Platinum developed a reputation for investing where peers might not. It owned a company that, according to the Securities and Exchange Commission, deceived terminally ill patients and sold them contracts that would be lucrative for the company if the purchaser died quickly.

The Platinum-owned company was run by a friend of Nordlicht’s and made more than $ 1.5 million from the moves, according to an in-house SEC judge’s ruling in January 2015. The SEC determined that the company had obtained confidential health data to make its bets.

The Platinum-owned company and Nordlicht’s friend forfeited the profits and paid additional penalties, without admitting or denying wrongdoing.

In 2011, Platinum’s performance remained positive even while one of its largest holdings took a pounding.

Nordlicht met that year with Martin Shkreli, then a little-known hedge fund manager, to discuss a bet Shkreli had made against a biomedical company called Neoprobe in which Platinum was invested.

Shkreli, who four years later would gain wide attention for buying rights to an old drug and jacking its price up fifty-fold, released a report in June 2011 outlining his negative thesis on Neoprobe. Its stock fell 39% that month.

Even so, Platinum’s flagship fund reported a gain for the month. The Platinum spokesman said, “Based on the conservative valuation of the position in the fund, when it declined in value, it did not have a significantly negative impact on performance.”

Platinum’s steady performance helped bring in money but also attracted authorities’ attention, people familiar with the probe said.

Such performance is rare but not unheard-of among those, like Platinum, that make loans or focus on complex parts of the fixed-income world.

Nearly all of Platinum’s investments, such as debt of distressed companies, are classified as “Level 3” under accounting guidelines, meaning a public market price for them isn’t available. SEC rules largely permit fund managers to do their own valuation for these if they follow set practices disclosed ahead of time.

Prices for the flagship fund’s Level 3 assets were determined by a committee made up solely of Platinum employees, including Nordlicht, according to the fund’s 2014 audit. Platinum said the panel’s director was formerly with a global accounting firm.

Platinum’s auditor, New York-based CohnReznick, declined to comment.

The 2014 audit wasn’t filed until September 2015. The delay irked two major investors, the Alex and Ruth Fruchthandler Foundation and a Brooklyn all-boys school called the Yeshiva Rabbi Chaim Berlin, that were seeking their money back. A lawyer wrote to Platinum on their behalf demanding it. Neither the foundation nor the school responded to requests for comment.

From the start of 2015 through mid-September, redemption requests received by the flagship fund exceeded inflows by $ 61 million, according to data in the delayed audit. Over the same period, it shows, the fund borrowed about $ 72 million, at annual interest rates of as high as 16%.

At one point, a lender had ties to Platinum – an insurer called Beechwood Re part-owned by family-member trusts of Nordlicht and Huberfeld. Huberfeld used an office at Beechwood, and it employed his son-in-law.

In one instance, a Platinum employee moved over to Beechwood and agreed to several deals to buy part of Platinum’s investment portfolio. Later, with those investments under pressure, the deals were restructured. Platinum ended up owing Beechwood around $ 70 million.

The employee later returned to Platinum.

Platinum said, “The transactions between Platinum and Beechwood were done for mutually beneficial purposes. Platinum’s investors benefited as did Beechwood’s insurance trusts.”

Beechwood said Huberfeld no longer has access to an office on its premises, and whatever personal materials he left were provided to the government.

Platinum told investors in its flagship fund in December it wouldn’t immediately be able to pay out full redemption requests, citing its concentration in hard-to-sell energy investments.

To plan an orderly liquidation of its funds, Platinum last week hired Bart Schwartz, an independent oversight adviser who earlier worked on returning to investors money caught in Bernard L. Madoff’s fraud. Hiring him is “key to serving investors’ best interests,” the firm said.

An audit of Platinum’s funds for 2015 still hasn’t been released. Nordlicht told investors in a June conference call that an audit was in “the late stages” but couldn’t give an exact time frame.

“It’s on our to-do list,” he said.

Write to Rob Copeland at rob.copeland@wsj.com

Christopher M. Matthews and Rebecca Davis O’Brien contributed to this article, which was published by The Wall Street Journal

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