Special Report: A top hedge fund manager that'south too hot for some to handle

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Source:   —  April 13, 2016, at 9:52 PM

Starting around two thousand ten, hedge fund manager Platinum Partners lent the reseller of electricity and natural gas tens of millions of dollars, and then took at minimum a twenty % equity stake in the fast-growing company.

Investing in Glacial Energy Holdings Incorporated should've been a disaster.

Starting around two thousand ten, hedge fund manager Platinum Partners lent the reseller of electricity and natural gas tens of millions of dollars, and then took at minimum a twenty % equity stake in the fast-growing company.

Then, trouble started. By two thousand thirteen, TX utility regulators had fined Glacial $100.000 for overbilling customers and not disclosing that founder and Chief Executive Officer Gary Mole’s previous energy venture had collapsed. Mole was forced to resign from the company’s Texas subsidiary.

Mole and his company were also targeted by former employees and a onetime partner in at least ten lawsuits from two thousand nine to two thousand fourteen, alleging, among other things, embezzlement, a hostile work environment, underpayment, and racketeering. Glacial beat back most of the valid challenges, but as debt mounted, the energy retailer filed for bankruptcy in two thousand-fourteenth, listing more than $one billion in unpaid obligations.

Platinum’s ownership stake in the company wasn’t worth much, according to a person familiar with Platinum’s history. But the firm had earned as much as $twenty million in interest on its Glacial loans, which carried annual rates as high as twenty-two percent.

Then, Platinum delivered the master stroke, snapping up Glacial’s assets out of bankruptcy for about $53 million. Since then, Agera Energy LLC, the Platinum-backed company that inherited Glacial’s customers, has quintupled in value, according to the person familiar with the hedge fund firm.

Turning painful situations into profit is the peculiar genius of Platinum founder Tag Nordlicht. The linchpin of his success: the increasingly favorite strategy known as asset-based lending. The idea is to allow high-interest loans to companies other lenders disdain and, if the company runs out of cash, get ownership and ultimately flip it for a profit.

With that approach, combined with more traditional investment strategies, Nordlicht has generated spectacular results. Platinum’s approximately $720 million Cost Arbitrage fund has generated average annual returns of about seventeen % since two thousand three, according to Platinum performance data reviewed by Reuters. The flagship fund’s investments are about evenly divided between private debt and shorter-term investments in stocks and other securities. The roughly $540 million Credit Opportunities fund, which focuses on debt, has averaged annual gains of 13.4 % since two thousand five, making money every mo but one. Neither has ever posted a decline for a calendar year.

Latest year, hedge funds overall dropped an average of about 1 percent. Platinum’s Cost Arbitrage fund, meanwhile, gained 9.4 percent, distant ahead of its sector average of two.46 percent. The Credit Opportunities fund gained 9.8 percent, trouncing a benchmark credit-fund gain of 0.07 percent.

And yet Platinum, with about $1.thirty-five billion below management, remains relatively tiny following to other high-performance hedge fund firms.

THE RISK FACTOR

Platinum has attracted sufficient pension funds, endowments and other institutional investors to bring their share of the firm’s assets to about 35 percent, according to the person with information of the firm, who declined to identify any of those investors. But they stay too few and their investments too tiny to vault Platinum into the big league.

An necessary reason is what industry insiders call “headline risk.” Nordlicht’s investments and his approach to them, these hedge fund investors say, arrive with too many potential public-relations challenges. On top of that, some investors worry that many of Platinum’s investments are too complex to exit quickly to cover heavy redemptions.

A Reuters review of Platinum’s investments, interviews with hedge fund investors familiar with the firm, as well as former employees, clients and associates, and a review of marketing and other documents indicate that Platinum has a history of investing in controversial businesses.

In their pursuit of outsize returns, Platinum and Nordlicht have keep money into a consumer finance company repeatedly fined for predatory lending before and after Platinum’s involvement, a pair of investments that turned out to be Ponzi schemes, and two energy companies that later went bankrupt and are facing criminal charges.

“Investors looking beyond the impressive headline returns will discover a pattern of behavior that raises serious questions about ethics, morals, and a host of other risks an investor should get to attain those returns,” said Ted Seides, the recently departed co-founder of hedge fund investment firm Protégé Partners.

The person familiar with Platinum’s thinking said the firm was aggressive with its investments, but always within the limits of the law.

One longtime Platinum investor, Bernard Fuchs, praised Nordlicht and said he wasn't concerned about liquidity issues or investments that might generate negative press.

“I know he’s an ethical, honest person,” said Fuchs, the former CEO of Lenoxx Electronics Corporation who presently invests personal and family money. “I would mortgage all our houses to invest with him, anything that he'd go for.”

One of the companies Platinum invested in that’s presently in bankruptcy, Black Elk Energy Offshore Operations LLC, began to untangle after three workers died in an explosion on one of its rigs and oil prices collapsed. Documents reviewed by Reuters, including internal company emails and valid agreements, indicate how Platinum rescued its investment even before bondholders and contractors were paid.

Nordlicht has also maintained ties to associates with troubled pasts. Kevin Cassidy, who's served time in prison three times for fraud and tax evasion, is presently a sales executive at Agera, the Platinum-owned power supplier. Murray Huberfeld, a financier who was ordered to disgorge profits and fined for violating securities laws at his Wide Capital, provided Platinum with start-up money and ran Nordlicht’s credit-focused hedge funds until Platinum took them over in two thousand-eleventh. He number longer works at Platinum but remains a client, according to two thousand fourteen tax filings for his charitable foundation.

Cassidy and Huberfeld didn't reply to requests for comment.

The person familiar with Platinum’s history said that the firm has made thousands of investments and that in the few cases that generated negative attention, Platinum was duped by dishonest business partners.

STRATEGIES AND SCHEMES

In an episode that attracted media attention in two thousand-fourteenth, the U. S. Securities and Exchange Commission found that Platinum subsidiary BDL Grouping invested more than $56 million in a scheme operated by two brokers at other firms who exploited the terminally ill.

Patients in nursing homes and hospice care were gulled into providing personal information in order to get a box of confection or a $250 gift; that information was used by the brokers to purchase long-term variable annuities that paid benefits to investors love BDL when the patient died soon after, according to the SEC.

BDL paid a combined $3.29 million profit disgorgement and penalty on the grounds that it made money on an illegal scheme. The two brokers at the heart of the operation were forced to repay their profits; one’s case is on appeal with the SEC.

Nordlicht’s companion and former colleague, Howard Feder, ran BDL and worked with the brokers to fund their strategy, according to the SEC. In a two thousand fourteen settlement with the agency, Feder was barred from the securities industry and paid a penalty of $130.000. At the time, the agency said Feder “understood the key components of the investment strategy.”

The person familiar with Platinum’s history said the firm wasn't alert that the brokers were engaged in illegal activity.

Feder didn't reply to a request for comment.

With its two thousand ten investment in Glacial, Platinum got involved in a company that already had a record of questionable spending.

In two thousand-seventh, internal financial statements of Glacial’s NY unit, reviewed by Reuters, indicate that Glacial CEO Mole and his team spent more than $671.000 on travel and entertainment – the same year for which the company ultimately recorded a loss of approximately $5 million.

More significantly, the two thousand seven statements indicate .9 million in “consulting” fees paid to a mining company in the Democratic Republic of the Congo.

These dealings were the basis for some of the lawsuits alleging various forms of wrongdoing filed against Glacial and Mole in ensuing years. All of those lawsuits were ultimately defeated, dismissed or pushed off into bankruptcy proceedings.

But one allegation gained extra wt in Sept latest year, when Mole was arrested on charges of tax evasion. The NY attorney common alleged that he funneled Glacial profits into the Congo mining company, which operated in a region where unlawful mining profits have been used to fund armed conflict. Reuters couldn't define whether the Glacial-linked mining company was involved in conflict minerals.

Mole pleaded not guilty; he faces up to fifteen years in prison if convicted. He didn't reply to requests for comment.

The person familiar with Platinum said the firm was alert of Mole’s spending and keep protections in space to curtail it.

EARLY SCANDAL

Nordlicht grew up exterior of NY City in suburban Long Island, and graduated from nearby Yeshiva Univ with a degree in philosophy in one thousand nine hundred-ninetieth. With $11.000 saved from what he'd received for his bar mitzvah, he started trading product options. In these early years, National Futures Organization records show, various NY exchanges fined him tiny amounts on eight different occasions, mostly for improper record-keeping.

In the early two thousand, after helping start a tiny private equity firm, he co-founded commodities brokerage firm Optionable. The NY Mercantile Exchange took a nineteen % stake in the fast-growing operation in early two thousand-seventh.

Later that year, Optionable collapsed in a trading scandal. Nordlicht, who resigned as non-executive chairman soon after, wasn't directly implicated. His co-founder, Kevin Cassidy, was. He was sentenced to prison for the third time in his career, this time for thirty months for deliberately misstating the cost of natural gas derivatives in conjunction with an employee of BMO Financial Group.

As Optionable imploded, Nordlicht was already building his Platinum business, having launched the Cost Arbitrage fund in two thousand-third with about $30 million.

Shortly after his release, Cassidy was hired as managing director of business development at Agera, the successor company to Glacial, along with other former Optionable and Glacial employees. Agera didn't reply to requests for comment.

The forty-seven-year-old Nordlicht lives an unflashy life in suburban Westchester County with his wife and children, generally driving himself to and from work at Platinum’s sleek midtown Manhattan offices.

He's powerful ties in the New York-area Jewish community, the source of some of his funds’ investors. These include, according to public tax filings for two thousand fourteen, a charitable believe set up by day-trading pioneer Aaron Elbogen, who was fined $1.4 million for illegal trading and bookkeeping while the chief executive of Datek Securities Corp; the Century twenty-one Associates Foundation, led by dept store executive Raymond Gindi; and the SFF Foundation, a non-profit controlled by the Schron family, known for its genuine estate investments. All declined to comment or didn't reply to requests for comment.

Nordlicht has enriched his investors with his focus on higher-risk debt that can yield distant more than traditional fixed-income investments. And after years of near-zero interest rates, it’s a strategy increasingly sought out by big, otherwise conservative institutional investors hungry for higher yields.

Still, many large money investors who have looked at Platinum have walked away. Cambridge Associates, which counsels some of the world’s largest pension funds and endowments, recommended to a client around two thousand ten that it not invest with Platinum and hasn't changed its stance on Nordlicht’s firm since then, according to people familiar with the situation.

In an email, Cambridge said it doesn't “discuss specific investment managers.” It added: “We can declare that we get our due diligence process very seriously.”

Among institutional investors that have considered putting money with Platinum but ultimately chose not to are the endowment of Yeshiva University, which is the alma mater of several Platinum employees, and large hedge fund allocator GAM, according to people familiar with the institutions.

One institutional investor that did obtain in is NY City’s Correction Officers’ Kind Association, according to two people familiar with the situation. The NY Times reported in June latest year that Norman Seabrook, the union’s leader, was below investigation by the U. S. Dept of Justice for potentially using his position to enrich himself. A wide subpoena from prosecutors requested that the union supply information related to Platinum, but the connection wasn't clear, according to the report.

A spokesman for the union declined to comment. The Justice Dept and Seabrook didn't reply to requests for comment.

Nordlicht has tried to polish Platinum’s image. In two thousand-tenth, he hired ING Investment Management veteran Uri Landesman, who as president of the firm courts large investors and serves as its public face. Platinum declined to create Landesman available for an interview.

Platinum also has added to its valid and compliance staff, increased information provided to clients, and created a “headline test” for prospective investments to avert horrible publicity, according to the person familiar with the firm.

That hasn’t stopped Platinum from pursuing investments love CashCall, which lends to people at annualized interest rates that can be in the triple digits. The company has faced valid actions in recent years from multiple states and the federal government for its aggressive marketing practices and charging interest rates over state limits. It's been compelled to pay refunds to customers in some cases, according to regulators.

Platinum subsidiary Bayberry CF Management has set up six or more funds since two thousand nine that have lent at minimum 3 million to CashCall, according to marketing documents reviewed by Reuters. One CashCall fund expected to pay investors as much as 17.5 % annually over three years, even after Bayberry took a 2 % fee and twenty % of the gains, according to a May two thousand thirteen marketing document.

A spokesman for CashCall declined to comment.

Nordlicht and his team frequently get positions in untidy situations that can be challenging or costly to exit quickly. The perceived liquidity risk has been heightened by Platinum’s policy of allowing investors to get money out of its two main funds every three months. That’s distant more frequently than most hedge funds that focus on private debt, which can lock up capital for several years.

“The mismatch in assets and liabilities could leave serious problems for those left holding the bag should the fund shrink in size,” said Seides, the veteran hedge fund allocator.

Platinum has told investors in recent years that it can manage mass redemptions thanks to large chunks of more liquid investments, at minimum in its main fund. It also believes that its faithful investor base of wealthy individuals and employees won’t flee at the first sign of trouble, according to another person with information of the firm.

That logic didn’t keep up latest year, as oil prices plummeted and volatility wracked markets. In response, Platinum extended the redemption notice from three to six months for the Cost Arbitrage fund. Then, in December, it keep about half the capital of the fund – much of it from the energy sector – in a so-called side pocket, meaning investors can’t get out their money on the normal schedule. When they can isn’t clear.

The move may ultimately defend investors from short-term losses, but changing liquidity terms is a last-resort measure that can turn investor sentiment against a fund.

BLACK ELK BLOW-UP

Platinum’s involvement with Black Elk shows just how complicated the firm’s investments can get – and how Nordlicht manages to wring profits from them.

Houston-based Black Elk was founded in 2007 to purchase no-longer-productive offshore wells at discounted prices and then utilize new technology to squeeze more oil and natural gas from them.

Platinum began investing in Black Elk in two thousand-ninth, first lending to it. Platinum later acquired preferred shares that eventually gave it majority control – and paid annual dividends of 20 % or more, according to securities filings and an external valuation report reviewed by Reuters.

Then, in two thousand-twelfth, an explosion on a Black Elk rig off the LA coast killed three workers, seriously injured three others and spilled oil into the Gulf of Mexico. A two thousand thirteen report from the U. S. Dept of the Interior’s Bureau of Safety and Environmental Enforcement found that the “safety culture” aboard the rig was “poor at best.” Even before the explosion, the company received hundreds of bureau citations for safety violations.

The Dept of Justice subsequently announced criminal charges against Black Elk and related contractors. Black Elk pleaded not guilty to involuntary manslaughter and other charges related to failing to chase proper safety practices. The case is pending.

That and other valid challenges after the explosion, combined with the collapse of energy prices, were among the issues that forced Black Elk into bankruptcy proceedings in August two thousand fifteen.

By then, however, the company had sold its main assets to Houston-based Renaissance Offshore LLC for $149 million. Most of the proceeds from that August two thousand fourteen sale went to a Platinum subsidiary. Black Elk then sold much of its remaining assets to Northstar Offshore Grouping LLC, a Houston company in which Platinum is a substantial investor.

Together, the sales helped Platinum and its investors eke out a modest profit on their Black Elk bet, according to the person familiar with Platinum’s history. The position was the largest holding in the Cost Arbitrage fund on March thirty-one, two thousand fourteen, worth as much as $186 million, according to the valuation report.

Black Elk’s creditors were left to ponder how Platinum was paid proceeds from the asset sale before them. Secured bondholders, for example, would normally have had first priority. Documents and interviews with people familiar with the transaction propose an answer.

Just weeks before the sale to Renaissance closed, Black Elk asked holders of $150 million of its high-yield bonds to approve a measure that let Platinum get proceeds of the transaction ahead of bondholders and other creditors.

Surprisingly, nearly seventy-five % of bondholders consented, according to a Black Elk earnings announcement in August two thousand fourteen. Reuters couldn't define the identities of all bondholders or how they voted.

“No bondholder in their right mind would ever vote to have their covenants stripped love that,” said one note owner. Lawyers and representatives for other secured bondholders didn't reply to requests for comment or declined to comment.

Internal Black Elk emails and valid documents related to its bonds indicate that various Nordlicht-controlled hedge funds owned about seventy % of the bonds before the vote and at minimum 47 % after. The person familiar with Platinum’s history confirmed that the firm voted its own bonds to approve the measure.

In addition, another large obstruct of bonds was held by affiliates of reinsurer Beechwood Bermuda International Ltd, according to a Black Elk bond modification document from November two thousand fourteen. Beechwood had hired former Platinum employee David Levy in November two thousand thirteen as chief investment officer of structured products. Levy returned to Platinum as co-CIO several months after the bondholder vote.

Beechwood spokesman David Goldin confirmed that Levy was responsible for Beechwood’s purchase of Black Elk bonds and for voting them in Platinum’s favor, along with the approval of other covenant changes. He said that those bonds were sold the mo after Levy left.

Platinum believes that the measure would've been approved even if the firm’s votes hadn't been counted by the bond trustee, Bank of NY Mellon, according to the person familiar with Platinum’s position. The Renaissance sale proceeds, the person added, were used to pay back investors in a private equity fund Platinum created and from which it took no fees.

A lawyer for Black Elk declined to comment on Platinum, citing the bankruptcy proceedings.

Black Elk founder and CEO John Hoffman left the company shortly after the sale to Renaissance. Black Elk’s following CEO, Jeff Shulse, left after the Northstar deal. According to a filing by Black Elk creditors as portion of the bankruptcy proceedings, both men left in protest over cash from the sales being used to pay Platinum. The filing alleged “a series of questionable transactions” that allowed $96 million from the Renaissance sale to go to Nordlicht’s firm “to the detriment of the company’s creditors and estate.”

Hoffman and Shulse declined to comment.

After the sale, some creditors cried foul. For example, in a lawsuit filed in LA state district Ct in April 2015 against Black Elk, Nordlicht and Platinum entities, contractor Shamrock Management accused Platinum of engaging in an “unethical scheme” to suck assets out of Black Elk and pay itself while stiffing creditors. The lawsuit seeks nearly $1 million for unpaid work and damages.

That lawsuit and more than a dozen others love it stay unresolved in the bankruptcy process, portion of two hundred sixty-one claims totaling $1.2 billion. The person familiar with Platinum’s position called the lawsuits a frivolous attempt to swindle Platinum of cash.

(Edited by John Blanton)

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