Hedge funds have received a pretty bad wrap since the last financial crisis. Some of the big stories that involved illegal behavior on behalf of hedge funds include Dreier LLP, Weavering Capital, Capitol Investments USA, Westgate Capital Management, Petters Group Worldwide, Stanford Financial Group, Madoff Investments, Bayou Hedge Fund Group, Scoop Management, ThinkStrategy Capital Management, Galleon Group, and SAC Capital Advisors, to name a few. Charges and convictions have included insider trading, running Ponzi schemes, misappropriation, and outright fraud. You can find a list we have complied over the years in our ever-expanding Hedge Fund Manager Hall of Shame.
On Monday, December 19, 2016, the New York Times released a story about Platinum Partners, a New York based hedge fund, and their $1 billion fraud. Those that were arrested included founder and Chief Investment Officer, Mark Nordlicht and six others for securities fraud in which, “executives used new investor money to pay older investors.” US Attorney Robert Capers describes Platinum Partners’ behavior as, “one of the largest and most brazen investment frauds perpetrated on the investing public.”
At its peak, Platinum managed close to $2 billion and reported double digit returns for a clientele that consisted of wealthy families and foundations in the city of New York. But those figures are highly suspect. Federal prosecutors in Brooklyn believed that Platinum overvalued their assets and misrepresented performance of certain funds since 2012. As the NY Times Article cites,
“In 2012, for example, executives misrepresented to auditors the value of Black Elk, an oil and gas company controlled by Platinum, valuing it at $283 million, prosecutors contend. In fact, there had been an explosion on a Black Elk platform in the Gulf of Mexico just one month earlier that had caused the deaths of three workers, injuries of other employees and an oil spill. Ultimately, when the firm was unable to pay all of its investors back, executives decided to pay some ahead of others, prosecutors said.”
We continue to see a persistent trend among many hedge funds that if you cannot beat the market then you might as well cheat and charge outrageous fees. We are proud to include Platinum amongst the many others on the Hedge Fund Manager Hall of Shame.
About the Authors
Tom Allen is an Accredited Investment Fiduciary (AIF®), Certified Cash Balance Consultant (CBC) and a Chartered Financial Analyst (CFA®) Level III Candidate. Tom received his Bachelor of Science in Management Science as well as his Bachelor of Art in Philosophy from the University of California, San Diego.
Mark Hebner - Founder, Index Fund Advisors, Inc.
Founder and President of Index Fund Advisors, Inc., and author of Index Funds: The 12-Step Recovery Program for Active Investors. He is a Wealth Advisor, with an MBA from the University of California at Irvine and a BS in Pharmacy from the University of New Mexico with a specialization in Nuclear Pharmacy.