United States Securities and Exchange Commission et al v. Platinum Management (NY) LLC et al
MEMORANDUM OPINION dated 11/20/17 re: that by Order dated November 11, 2017, I granted the Receivers application to approve the retention of Houlihan Lokey Capital, Inc. (Houlihan), nunc pro tunc to September 11, 2017(the Application), overruling th e opposition to the Application filed by a large group of non-insider Platinum Partners Credit Opportunities (PPCO) investors (the Objecting Investors). This Memorandum Opinion sets forth the basis for that Order. ( Ordered by Judge Brian M. Cogan on 11/20/2017 ) (Guzzi, Roseann)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
SECURITIES AND EXCHANGE
: MEMORANDUM OPINION
: 16-CV-6848 (BMC)
- against :
PLATINUM MANAGEMENT (NY) LLC;
PLATINUM CREDIT MANAGEMENT,
L.P.; MARK NORDLICHT; DAVID LEVY;
DANIEL SMALL; URI LANDESMAN;
JOSEPH MANN; JOSEPH SANFILIPPO;
and JEFFREY SHULSE,
COGAN, District Judge.
By Order dated November 11, 2017, I granted the Receiver’s application to approve the
retention of Houlihan Lokey Capital, Inc. (“Houlihan”), nunc pro tunc to September 11, 2017
(the “Application”), overruling the opposition to the Application filed by “a large group of noninsider Platinum Partners Credit Opportunities (“PPCO”) investors” (the “Objecting Investors”).
This Memorandum Opinion sets forth the basis for that Order.
The Alleged Platinum Partners Conspiracies
The Securities and Exchange Commission (“SEC”) commenced this civil action on
December 19, 2016, alleging that defendants Platinum Management (NY) LLC (“PMNY”) and
Platinum Credit Management, L.P. (“PCM”), as well as individual defendants Mark Nordlicht,
David Levy, Daniel Small, Uri Landesman, Joseph Mann, Joseph San Filippo, and Jeffrey Shulse
(the “Individual Defendants”) (collectively, the “Civil Defendants”), participated in multiple
fraudulent schemes in violation of various securities laws.
Just prior to the filing of this civil action, on December 14, 2016, an indictment (the
“Indictment”) was filed in this district charging each of the Individual Defendants with various
counts of conspiracy to commit securities fraud and wire fraud, securities fraud, and investment
advisor fraud. The civil and criminal actions address essentially the same two allegedly
First, the Indictment and civil complaint allege that between November 2012 and
December 2016, the Civil Defendants concealed a growing liquidity crisis at Platinum Partners’
flagship hedge fund, Platinum Partners Value Arbitrage Fund L.P. (“PPVA”), overvalued the
performance of PPVA’s assets, liquidity, and investments, and concealed the purpose of various
transactions in violation of PPVA’s governing documents. The Indictment and civil complaint
also allege that select investors were paid requested redemptions of their investments in PPVA
ahead of and/or in lieu of other investors, contrary to PPVA’s governing documents.
Second, the Indictment and civil complaint allege that between November 2011 and
December 2016, certain of the Individual Defendants defrauded third-party holders of Black Elk
Energy Offshore Operations, LLC (“Black Elk”) bonds and deprived those bondholders of the
proceeds of a Black Elk asset sale through misrepresentations regarding PMNY’s ownership and
control over the bonds. After the SEC action was filed and the Indictment was unsealed, the
Government moved on January 23, 2017 to intervene in the SEC’s civil action and sought a stay
of the civil proceedings pending the resolution of the parallel criminal action and ongoing grand
jury investigation. On July 7, 2017, the Court granted the United States’ motion to intervene and
stay discovery pending the outcome of the associated criminal proceeding.
The SEC Receiver
All Platinum entities (the “Receivership Entities”), and all of their assets (the
“Receivership Assets”) are under the control of a Receiver. The Court first entered an order
appointing a Receiver on December 19, 2016, the same day that the SEC commenced this action,
and entered an Amended Receiver Order on January 30, 2017. On July 6, 2017, the Court
accepted the resignation of the original Receiver, Bart Schwartz, and appointed Melanie L.
Cyganowski as Receiver. On October 16, 2017, the Court approved a Second Amended Order
Appointing Receiver (the “Receiver Order.”).
The Receiver Order provides that the Receiver is, among other things, to preserve the
status quo, ascertain the true financial condition of Receivership Entities and the disposition of
investor funds, prevent further dissipation of the property and assets of the Receivership Entities,
protect investors’ assets, and conduct an orderly wind down including a responsible liquidation
of assets and orderly and fair distribution of those assets to investors. The Receiver Order
authorizes the Receiver to develop a plan (in conjunction with any other party), for the fair,
reasonable, and efficient recovery and disposition of all Receivership Assets. This authorization
expressly includes the right to develop a plan of liquidation. Additionally, the Receiver Order
authorizes the Receiver, subject to Court order, to hire individuals or entities to assist in carrying
out her duties.
The Receiver’s Proposed Retention of Houlihan and the Abdala Tailings Project
On October 16, 2017, the same day she was appointed, the new Receiver filed the
Application, seeking the Court’s approval for her retention of Houlihan, nunc pro tunc to
September 11, 2017 (the date in which she entered into an engagement letter with Houlihan).
The Receiver sought Houlihan’s assistance in providing financial advisory and investment
banking services in connection with the disposition of certain Receivership Assets. The original
Receiver had retained an affiliate of Houlihan, Houlihan Lokey Financial Advisors, Inc.
(“HLFA”) to provide valuation services with respect to some investments in the Receivership
The Receivership Entities hold a diverse set of investments that generally fall into three
categories: life settlement investments, litigation finance investments, and “other” assets, which
primarily consist of investments in developing companies that work in the metals and mining
sectors. The Receiver has been working to determine how to best dispose of the various
Receivership Assets. The disposition of liquid Receivership Assets is relatively straightforward,
but the Receiver argues that she would benefit from the skill of a professional institution, such as
Houlihan, in the disposition of illiquid financial assets, including some of the “other” assets.
One of the assets in this category that the Receiver seeks Houlihan’s assistance in disposing of is
an investment in the Abdala Tailings Project (“Abdala”), a Brazilian gold prospect. PPCO owns
a 10-year mining right over the “tailings dam” of the prospect. 1
In presenting Abdala to investors, Platinum’s managers advised of the possibility of
substantial returns – between $450 and $550 million. As part of its earlier work for the original
Receiver, HLFA valued Abdala at a more modest range of between $55 and $114 million,
assuming that PPCO invested an additional $5 million into it. The original Receiver noted,
however, that if the investment were liquidated instead, PPCO would not recover its cost basis of
approximately $10 million. The original Receiver ultimately cited disagreement with the SEC
over the disposition of Abdala as one of the reasons for the breakdown in his relationship with
the commission, which led to his resignation. The original Receiver claimed that his team
A tailings dam is an earth-filled embankment used to store byproducts of mining operations.
conducted substantial due diligence and concluded that the risks of proceeding with the
investment in Abdala are low, and carry the prospect of a significant return.
The Objecting Investors have no issue with the Receiver’s retention of Houlihan with
respect to any Receivership Assets except for Abdala. They argue that the Receiver has made
the decision not to invest in Abdala without providing a detailed explanation of her reasoning,
and that Houlihan does not possess sufficient expertise in minerology, natural resource
extraction, or South America, to properly dispose of Abdala.
The Receiver and Houlihan negotiated a fee structure that provides a set base
compensation, but is largely incentive-based, rewarding Houlihan if the Receivership Assets are
disposed of above certain thresholds. Of the Receivership Assets with individualized incentive
structures, sale of the Receivership Entities’ interest in Abdala promises Houlihan the greatest
percentage fee: 5% of the transaction value of any sale up to $40,000,000, and 8% of any
transaction value greater than $40,000,000.
The Court has considered the Application, the Objecting Investors’ response to that
application, and the Receiver's Reply. Tellingly, the Receiver did not receive any opposition
from the SEC, the Civil Defendants, the former insiders of the Receivership Entities, any
purported secured creditors, or the vast majority of investors in the Receivership Entities.
Instead, a solitary group of investors opposes the retention only with respect to Abdala, which is
best described as a speculative Brazilian gold prospect into which the Objecting Investors want
the Receiver to invest millions of dollars. The Objecting Investors’ arguments are meritless, and
evince a fundamental misunderstanding of the purpose of the Receiver. The time to gamble is
over; all that is left is to prudently secure what value remains in the Receivership Assets.
As an initial matter, the Receiver has convinced the Court of good reasons for retaining
Houlihan. First, Houlihan offers an “Illiquid Financial Assets” (“IFA”) team focused on the
particularly challenging “other” assets with which the Receiver seeks help. The Receiver argues
that Houlihan’s IFA team is widely recognized and experienced in advising on the disposition of
a range of complicated investments. Notably, the Objecting Investors do not, as a general
manner, dispute Houlihan’s expertise. Second, Houlihan’s experience in disposing of such
assets means that it has long-standing relationships with different kinds of potential investors,
including secondary funds, financial institutions, sovereign wealth funds, hedge funds, family
offices, pension funds, insurance companies, endowments, foundations, and public vehicles.
Because of these relationships, Houlihan is well-positioned to provide the Receiver with valuemaximizing liquidation options. Third, Houlihan has prior knowledge about the Receivership
Assets because of HLFA’s earlier role in assisting the original Receiver. Houlihan will therefore
need less time than would another firm to get up to speed on the nature of the Receivership
Assets. Fourth, the Receiver states that her decision to retain Houlihan was the outcome of
months of study by her and her team of the Receivership Assets, and consideration of Houlihan’s
No party has raised any objection to the Receiver’s proposed compensation scheme for
Houlihan. In light of the scale and complexity of the work it is being retained for, the Court
finds that the proposed compensation is reasonable.
The Objecting Investors’ concerns unduly rely upon the projections of the very managers
now accused of a series of fraudulent conspiracies, and show a misunderstanding of the role of
the Receiver. The Objecting Investors contend that investment in Abdala could generate a return
of between $450 and $550 million. But, as described above, this range was provided by PPCO’s
former managers, who have been criminally charged with years long conspiracies to
intentionally inflate asset values. There is no cause to put any faith in their projections. Indeed,
the Receiver noted in an August 10, 2017 status report that “[a]s a general matter,  the Receiver
has not found support for the values reflected on Platinum’s books or for certain early indications
of value in the Receivership.”
The Objecting Investors also point to HLFA’s preliminary, and considerably more
modest assessment of Abdala’s value ($55 to $114 million). This range is not guaranteed,
though; it is merely possible. Tellingly, the PPCO managers who made the optimistic
assessments that the Objecting Investors rely on do not object to the Receiver’s decision to
market Abdala. If there were a real promise of a valuable return, presumably the managers
would attest to it.
The Objecting Investors argue that the Receiver has not considered options other than
liquidation. This allegation is contradicted by the Receiver’s credible statement that she
thoroughly evaluated Abdala and made the reasonable and informed determination that
marketing the asset was in the best interests of the Receivership. It appears to the Court that the
Objecting Investors are transparently complaining about a decision, trusted to the sound
judgment of the Receiver, that does not align with their own narrow interests, and that their
complaints about Houlihan’s qualifications are largely another way of getting at that point.
Regardless, as independent investors in this case have previously stated, “it is for the receiver as
fiduciary to the Fund’s investors…to make the determination of what course of action best
maximizes the recovery available to the investors.” That is precisely what she has done here. In
fact, the incentive structure described above means that more so than with any other
Receivership Asset, Houlihan is incentivized to seek the maximum possible sale price for
Finally, the premise of the Objecting Investors’ argument turns on a fundamental
misunderstanding of the role of the Receiver. The Receiver is not tasked with making
speculative investments. Instead, she is entrusted with the responsibility to prudently wind-down
the Receiver Entities and dispose of the Receivership Assets in a manner that safely returns to
stakeholders what value can be salvaged. She is not empowered to jeopardize that return by
indulging in risky investment opportunities with the very money she has been charged to return
to the victims of alleged years’ long fraudulent conspiracies. It is clear to the Court that these
investors are frustrated by their inability to realize the investment returns they were promised,
but that frustration does not justify the Receiver using the limited remains of alleged conspiracies
to look for South American gold.
Digitally signed by Brian M.
Dated: Brooklyn, New York
November 20, 2017
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