Lawsuit: New York Hedge Funds Knew Rothstein Scheme Was a Fraud

Two New York hedge funds -- Platinum and Centurion -- poured an estimated $200 million into disbarred lawyer Scott Rothstein's Ponzi scheme, according to a massive amended civil complaint filed earlier this week.

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Rothstein with George Levin
Both hedge funds -- which had nearly a billion dollars at their disposal -- are now named as defendants in attorney Bill Scherer's lawsuit seeking damages from a slew of alleged co-conspirators in the $1.2 billion Ponzi scheme.

The suit includes numerous potentially damning emails from managers of the hedge funds -- including Meir "Mark" Nordlicht and Jack Simony -- that indicate they had knowledge that Rothstein's investment scheme was fraudulent beginning after the Ponzi suffered what one of the scheme's insiders termed a "meltdown" in April 2009.

"In early 2009 Platinum and Centurion, through incontrovertible evidence, learned that Rothstein was perpetrating a major fraud," the lawsuit alleges. "Gravely concerned about their considerable financial exposure, Simony and Nordlicht 

formulated a plan to secure the withdrawal of Platinum and Centurion's money from the Ponzi... [T]he plan was predicated on remaining silent and concealing their discovery of the Ponzi even hiding the details from [Platinum and Centurion] investors."

It was in April of last year that Rothstein made only partial payments to Platinum and Centurion, which invested in the scheme via loans to the Banyon hedge fund operated by close Rothstein associate George Levin, who reportedly raised a total of $657 million to put into the scheme. 

Because the bogus settlement deals at the heart of the Ponzi scheme were supposed to have been prefunded by defendants and placed in trust accounts, a failure to pay was a clear "red flag" that the scheme was fraudulent, the lawsuit alleges. Further, Rothstein admitted in correspondence that he borrowed some of the money to repay the hedge funds, which was a clear sign that the scheme was a façade.

In fact, the emails contained in Scherer's complaint seem to substantiate the claim. The problems began on April 13, when Platinum's Will Slota wrote an email to Banyon Chief Operating Office Frank Preve, who had an office at the Rothstein Rosenfeldt Adler firm and was working closely with Rothstein on the scheme, indicating that millions in payments had been missed. Slota also copied the email to Nordlicht and two other Platinum managers, Ari Glass and J. San Filippo.

"Moments ago, Banyon Investments Collection received a wire in the amount of $256,250," Slota wrote. "This is the payment amount due to Banyon Resources today, Monday, April 13. The payment amount due to Banyon Investments Collection today is $7,765,300.94. Please advise."

This should have sent major "alarm bells," according to the lawsuit, and it certainly seems to have done just that with Preve, who wrote an email to Rothstein: "This is exactly what we needed to avoid. Between the phone call to Mayer [Nordlicht] and this wire, we have opened the floodgates of doubt. Why send them anything if we are going to only send them $256k?? What is the plan for the next 20 minutes? Give me a shout when you finish with BSO so I can respond to the NY calls."

In an April 29 email, Rothstein wrote to hedge funder Simony: "I have borrowed the [$15 million] to pay platinum this week."

The lawsuit alleges that email "alone is direct evidence of fraud because... Platinum and Centurion knew that Rothstein should not need to borrow any money."

But that's just the beginning. Simony and Nordlicht, according to the correspondence contained in the lawsuit, desperately began to try to get whatever money they could from Rothstein to keep their own investors at bay.

On May 1, 2009, Nordlicht wrote Rothstein concerning an investor "who is going to blow up my fund on mon and create major headaches for all involved. [The investor] wants to do it now already but I held him off by saying I gave george [Levin] my word. Please any wire at all is mustered today will help stabilize the situation even if full amount doesn't come until Monday. PLEASE HELP-I'm dying here..."

That same day, Rothstein emailed both Preve and Levin, "Just wired plat[inum] a million that I borrowed."

It's clear from the correspondence that Platinum and Centurion considered taking action against Banyon and Rothstein due to lack of payment. In an email that may have been a thinly veiled threat, Rothstein wrote to Nordlicht on May 6, 2009: "Obviously, given these and all the other pendent circumstances, Banyon and my firm expect that you will not issue a default against Banyon. I am certain that given all of our conversations and all that has transpired, you understand that such an act would serve no one's purpose, with a result none of us want."

Rothstein seems to be saying that if he and Banyon go down, so will Platinum and Centurion. The next day, Nordlicht was again begging for money, specifically a scheduled $6.5 million payment. He wrote to Preve that he needed the money for Platinum "whether it be from yesterday's funds or if the bar releases everything. I cannot nail down nav without it and investors are starting to ask q's. MUST HAVE TODAY."

Preve later that same day, according to the lawsuit, wrote Rothstein: "Jack [Simony] seems to think Mark [Nordlicht] is going off the deep end......says they need something to keep them alive......."

While Simony is apparently panicking, Nordlicht plays the role of a cooler head. But he still needs the money. On May 18, Nordlicht emails Preve what he calls a "friendly reminder."

"[W]e are behind 1.5 million from the end of last month and have an additional 15 [million] due today," Nordlicht writes. "I am told centurion and level 3 are owed 1.5 each today as well. Hopefully the logjam is breaking. Don't mean to be a nag (we leave that to Jack) but feeling a lot of pressure on my end."

Preve forwarded that email to Rothstein, who didn't take it well.

"What the hell is that bullshit about u being concerned about the lack of direct releases... u make me sound like the problem. And I didn't start this shit. Don't hang me out to dry with these motherfuckers."

Then comes this reply to Rothstein from Preve:

"....concerned? I am petrified... if word gets out that we are $125m past due we will never see another cent in 3rd party fundings including the PPM. We will have the auditors looking at the books in another 12 days and that also gives me great concern ... it is so easy to see the sudden lack of releases and you know auditors... everything has to be explained in footnotes... and by the way, no one is throwing you under the bus... all we have done is support you at every single turn and we will continue to do so. The fact that I am concerned that 25% of our portfolio is past due should not come as a surprise to you, to the Bar, to God, or to anyone else that notices that I am walking around smelling like I just peed my pants."

A little over four months later, the Ponzi imploded. It doesn't appear that Platinum or Centurion ever notified anyone of their concerns before Rothstein's flight to Morocco.   

"[R]ather than blow the whistle on the fraudulent scheme, Platinum and Centurion instead chose to remain silent, to conceal damning information, and to willfully accept payment of dirty Ponzi money," the lawsuit alleges.

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