By Eve Mykytyn

With all the attention on the political conventions, random terror attacks and the upcoming Olympics (where we Americans may have finally defeated the Russians without the inconveniences of competing in sports), Wall Street’s latest billion dollar fraud has gone little noticed.

Platinum Partners and its various funds claim a value of $1.25 billion and have stated average annual return rates of between 10 and 17% for at least ten years. The funds are primarily the creation of two men, Murray Huberfeld and Mark Nordlich. Platinum has run on a perpetual stream of unsavory, semi-legal and immoral investments that enriched the owners of Platinum, their families and their foundations.

Mr. Huberfeld pleaded ‘not guilty’ last week to charges that he paid $60,000 to the head of the union of New York City Corrections Officers in return for a union pension fund investment of twenty million dollars in Platinum Partners. According to The New York Times, the hedge fund also gave an $18,000 donation to a charity with ties to Jona Rechnitz, allegedly to thank him for making the connection. Rechnitz is one of the two Orthodox businessmen at the center of a widespread investigation into corruption in NYC.

So why did Mr. Huberfeld risk such an obvious bribe? It seems Platinum Partners, despite its claims of extraordinary results, was having trouble repaying its investors. The Securities and Exchange Commission (SEC) and the Federal Bureau of Investigation (FBI) have not released the results of their investigations, so the full extent of the scandal is not yet known, but here’s what’s we do know.

Mr. Huberfeld is a former penny stock trader (the profession so beautifully amplified in ‘The Wolf of Wall Street,’ the movie, itself, the subject of a financial scandal). In 1992, Huberfeld and David Bodner pled guilty to sending other men to take their brokerage exams. According to Barrons, Each was sentenced to a minimum of one year's probation and fined $50,000. Question as to why that crime in itself did not bar the men from the brokerage industry.

Then in 1996, Huberfeld and David Bodner both individually and as co-owners of Broad Capital were ordered by the SEC to repay $4.7 million plus penalties for illegally selling restricted stock in 1993-4.

Mr. Nordlicht is a former commodities options trader. Between 1990 and 1998, various New York exchanges fined him small amounts for eight separate transgressions. In 2001 Nordlicht and another investor opened a commodities brokerage firm, ‘Optionable.’ Optionable later collapsed after it helped one of its clients conceal a 524 million dollar loss. Nordlicht was not directly implicated but his partner went to prison for 30 months.

In 2002 Huberfeld and Bodner were among the initial investors in a hedge fund started by Nordlicht. The following year, Nordlicht returned the favor and invested in Huberfeld’s first fund, presently renamed ‘Credit Opportunities,’ a fund that specializes in making poor credit loans or, minus the euphemism, high end loan sharking. The fund has claimed an average annual rate of return of 13.2%.

These two funds and various others have made up Platinum Partners since 2003.

In 2005, the men began soliciting investments for their funds from the Jewish community. They joined a trip to the Vatican sponsored by the Simon Wiesenthal Center and met a number of potential investors. Mr. Huberfeld recently resigned from the Center’s board. According to The Wall Street Journal, “Another investment source was Touro College, a Jewish-oriented New York college whose board of overseers Mr. Huberfeld joined in 2003. It invested endowment funds with Mr. 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 Mr. Huberfeld’s listing on the Board of Overseers and Touro’s investment in the fund.”

Platinum specializes in ‘level 3’ investments. These are risky investments that the accounting profession will not value. Firms that own such investments are allowed to set the value as they see fit, and Platinum did so with a committee made up of its own employees.

Here are a few of the investments Platinum has made.

In 2007, one of Platinum’s funds (BDL) invested in insurance annuities that paid only after an investor died. A rabbi in Los Angeles working with the fund stole the personal information of hospice patients so that BDL could buy the annuities using the dying person’s name. Common law forbids one from buying insurance on the life of a person with whom you have no relationship because of the obvious temptation for malfeasance. Somehow, these annuities just skirted this rule. In January 2015 the SEC found that the fund had obtained and used confidential medical information. The fund and the rabbi were required to pay the SEC over four million dollars but not required to admit wrongdoing.

In August 2015, prosecutors in Louisiana filed criminal charges against an oil company that had been Platinum’s biggest investment in connection with an explosion that killed three workers. And in September 2015, the former head of an energy company in which the fund had a significant stake was arrested for tax evasion.

And yet, the business press continued to tout Platinum’s returns, marveling at how they could make profits from Singapore’s penny stocks or mini marts in China. Platinum invested with a number of payday lenders (high interest short term lenders) including one called ‘Cashcall’ that is the subject of a federal protection bureau suit. In February of this year, Reuters published a cautious but generally laudatory article on the Platinum funds, warning that they were risky but highly rewarding.

Some were better able to read the tealeaves. “Neither [Platinum Funds] has ever had a down year, and the credit fund has had only one losing month in its nearly 11 years. Even Bernie Madoff had a few down months sprinkled into his toxic cocktail.”

In November 2015, Platinum Partners received a default notice over a put option (a contractual obligation to sell at a certain price) involving $30 million of notes. Platinum stated that it was unable to pay for $7.5 million of notes it was legally required to repurchase.

That month, two prominent Jewish investors the Fruchthandler family, (real estate), and the foundation for one of the oldest Brooklyn yeshivas, Yeshiva Rabbi Chaim Berlin, reported Platinum to the SEC for non-payment of over $600,000 in redemptions dating back to 2014.

Then in July, Platinum Partners saw its second-largest public holding, Echo Therapeutics (glucose monitoring) plunge by 17.3 percent after Nasdaq informed it at the end of market trading on Friday that it would be delisted because it did not meet the minimum $2.5 million stockholders’ equity requirement.

Despite all these hits, Nordlicht has claimed that all will be made right, with “God’s help.” New York State Judge Salinann Scarpulla, who is handling Platinum’s default on $30 million in debt, is a bit less sanguine than Nordlicht that God is on Platinum’s side.

“I haven’t seen evidence that the fund is worth a billion dollars. For all I know the fund is worth five cents,” an exacerbated Scarpulla said after failing to get satisfactory answers to her questions about the hedge fund’s financial status. Judge Scarpulla ordered Platinum’s lawyer to call Platinum in the middle of a hearing to get someone on the phone to assure her that they have the money to repay their debt. Instead of assurance, Platinum’s in-house legal counsel requested 48 hours to make any kind of guarantee, which has of course, it has never done.

As redemption requests increased, probably beginning as early as 2012, the funds raised money by selling assets to a related insurance company and borrowing hundreds of millions of dollars at rates as high as 16.7%. Judge Scarpulla may well be correct; Platinum Partners may not be worth a nickel.

The firm has blocked redemptions and told investors they will not receive anything until at least 2017. Last week, Platinum hired Bart Schwartz, who distributed Madoff’s assets, to liquidate the funds. Madoff’s investors received about 63% recovery on assets and those who invested less than 1.1 million dollars were made whole. Investors in Platinum seem unlikely to do as well.

The scam was not particularly well concealed. Both partners had a history of shady practices and they promised returns unavailable anywhere else. Why after its multiple run-ins with the partners, wasn’t the SEC warning investors?

According to The Forward, Huberfeld alone gave “millions in grants a year to Jewish charities. In 2014 alone, the [Huberfeld’s] foundation gave out $3.1 million, much of it to synagogues linked to the Chabad-Lubavitch Hasidic group, and to ultra-Orthodox institutions in Boro Park.” The Forward praises Platinum’s charity while criticizing its methods. This is a bit like thanking a bank robber for the gift.

The Jewish newspaper, The Observer, provides some insight in discussing the reluctance of Jewish investors who complained to the SEC to make their complaints more public. “The Jewish community to which Huberfeld and all the players in this drama belong reserves special contempt for Jews who turn in other Jews. A moser—a collaborator or informer—is the worst thing a Jew can be. The Oxford Dictionary of the Jewish Religion defines informing as, “The most heinous crime in the Jewish community and the informer its most despicable character. Every step against him, even taking his life, was permitted in order to safeguard the interests of the community.” against informers…For the Fruchthandler family to go to the SEC with its complaint against Huberfeld, knowing how that would be viewed by their peers, indicates an escalation to the point where they must have seen no other option to get their money back.”

Then The Observer calmly states who among those wronged by Platinum matters the most. Referring to Platinum’s role in the New York City corruption scandal, the Observer notes, “Huberfeld….clearly has more to worry about than stuffing cash into a Salvatore Ferragamo bag on behalf of a Correction Officers Benevolent Association official with posh tastes.” Apparently, they believe that it is worse to harm your Jewish investors than investors who are New York City’s corrections officers.