Just what was it that Bernie Madoff taught the financial world? Apparently, very little in an ethical sense. The executives of Platinum Partners could soon be heading off to jail in their creation of a yet another type of Ponzi scheme. Until Wall Street begins to take ethical training seriously, these types of scams will be happening again and again.
Five executives of the hedge fund were just charged for committing securities fraud to the tune of $1 billion. Among the bogus companies they managed was Black Elk Energy, where the partners “only” defrauded about $50 million.
Once again, investors were tricked with reports of a fantastic average return of 17% from 2003 to 2015. As with any house of cards, Platinum Partners started to fall apart when investors started to ask for their money. The management kept deferring those requests and the house of cards began its inevitable decline as far back as 2012.
How did they get away with fraud for so long? By overvaluing their assets and hiding cash flow difficulties. So as to not make it look like a Bernie Madoff clone was not pulling strings, they paid out funds to some customers to make them seem like good guys. In fact, very much like Madoff they used borrowed funds and money from new investors to pay off existing investors.
$1.7 billion in Assets? Hardly!
In March 2016, Platinum Partners stated to the SEC it had $1.7 billion under their management. They lied. The money they claimed they had invested was all under
Platinum Partners Value Arbitrage Fund and Platinum Partners Credit Opportunities Master Fund. As the company’s financial crisis worsened, they were investing into thin air.
A majority of the investors were apparently members of Brooklyn’s Jewish religious community. They were lured to invest by men in the company purporting to be religious Jews. This is a very important, though tragic ethical lesson. Unethical crooks of any religion do not care who they hurt. There is no conscience, there are no rules of decency.
As long as the partnership group had the opportunity to deceive people, they took full advantage of their trust and good nature. They continued their lies by overvaluing their funds.
They were so full of deceit, that even on conference calls with investors, they continued their blatant lies by telling investors how clever they were by being responsive to changes in the market.
However, the company began to crumble in early 2016, when a former company executive was indicted for conspiracy along with the head of a union. There were apparently bribes in place where pension fund investors knowingly invested in Platinum Partners in return for kickbacks. As the indictment proceeded, more discoveries were made about the company and the SEC along with thousands of investors began to realize their worst fears. Investors weren’t being repaid because there was no money to repay them.
Brightest Guys in the Room
The investment world has been replete with stories about the so-called “brightest guys in the room,” of men and women who portray themselves to be so righteous, knowledgeable and arrogant that they always know best. These types scoff at any suggestion they are being remotely unethical.
Investors become blinded to reality, for that is what deceitful crooks are able to create: a false reality. On one hand, Platinum Partners showed a historical 17% return and on the other hand, investors could not access their money.
When poor ethics over take common sense, every legitimate entity loses. Until mandatory ethical training with the warning of consequences is imposed on executives of firms such as Platinum Partners this type of fraud will continue.