A founder of the New York hedge fund Platinum Partners and six others were arrested on Monday morning on charges relating to a $1 billion fraud.
The men were charged with securities fraud and investment adviser fraud in a $1 billion scheme in which executives used new investor money to pay older investors, according to an unsealed indictment filed in Federal District Court in Brooklyn.
Mark Nordlicht, a founder and chief investment officer, and David Levy, co-chief investment officer, were among those arrested.
Federal prosecutors in Brooklyn contend that since 2012, executives overvalued the assets that Platinum invested in and misrepresented the performance of certain funds, at times inflating the value significantly.
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.
Founded in 2003, at its peak Platinum managed nearly $2 billion of investor money. For years it reported a strong performance — with its flagship fund reporting double-digit returns for investors. Platinum executives were known to tap money from prominent families and foundations within the Orthodox Jewish community in New York.
The arrests on Monday were part of an investigation among several government agencies, including the Federal Bureau of Investigation and the United States Postal Inspection Service. In June, Murray Huberfeld, a former Platinum executive, was arrested. He has pleaded not guilty to conspiracy and wire fraud.
Soon after Mr. Huberfeld’s arrest this summer, agents from the F.B.I. and the United States Postal Inspection Service raided the New York City offices of Platinum, located just a few blocks from Central Park. Faced with mounting pressure from federal investigators — as well as an investigation by the Securities and Exchange Commission — Platinum liquidated its main hedge fund.
The United States attorney in Brooklyn, Robert Capers, and Andrew Ceresney, director of enforcement at the Securities and Exchange Commission, are expected to discuss the charges at a news conference later on Monday.