Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—2d Cir.: Appeals court vacates acquittal and new trial orders for Platinum defendants, (Nov 8, 2021)

By Jeffrey H. Brochin, J.D.

The government had sufficient evidence at trial to warrant convictions in a vote rigging scheme that diverted $100 million in asset sale proceeds from bondholders to preferred equity shareholders.

The U.S. Court of Appeals for the Second Circuit has vacated the district court's order and judgment that granted the post-trial motions for acquittal and for a new trial, respectively, for two defendants in the Platinum-Black Elk high profile securities fraud prosecution. The appeals court found that the government’s evidence at trial did not weigh heavily against the jury verdicts of conviction in the case, and they therefore reversed the district court’s orders and remanded for further proceedings (United States. v. Levy, November 5, 2021, Sack, CJ).

Black Elk-Platinum connection. The appeal concerns a scheme allegedly executed by defendants-appellees Mark Nordlicht and David Levy to defraud bondholders of an oil and gas company, Black Elk Energy Offshore Operations, LLC, of the proceeds of a lucrative asset sale to Renaissance Offshore, LLC (the Black Elk Scheme). Central to the alleged Black Elk Scheme was a New York-based hedge fund known as Platinum Partners L.P., which consisted of multiple investment funds. Nordlicht and others founded Platinum in 2003, and Nordlicht was the chief investment officer (CIO) of various Platinum entities.

One of Platinum's largest investments was in Black Elk, headquartered in Houston, Texas and in 2010, Black Elk raised capital by issuing $150 million in bonds. Black Elk also issued a Series E preferred security in early 2013, of which Platinum purchased the majority.

Black Elk financial woes. Black Elk experienced significant financial setbacks between 2012 and 2014, and it appeared that the company was headed toward bankruptcy. The government alleged that Nordlicht, Levy, and their co-conspirators sought to limit Platinum's losses in the event of a Black Elk bankruptcy, by orchestrating the sale of Black Elk's most valuable assets to Renaissance and fraudulently manipulating the priority structure by which Black Elk debt and equity holders would be repaid. They did this by amending the Indenture to ensure that the proceeds of any asset sales went to the preferred equity holders (in particular Platinum) instead of to the bondholders who would have had priority to those proceeds.

Rigged consent vote. The government alleged at trial that in order to modify the priority structure, it was necessary for a majority of the outstanding bonds to consent (against their interest) to an amendment to the bond indenture and that the defendants rigged the vote of bondholders by fraudulently concealing their control over certain bonds, including those owned by an affiliate, Beechwood, in violation of the bond indenture, to ensure that the amendment would pass. As a result of the alleged fraud, the defendants unlawfully diverted nearly $100 million in asset sale proceeds from the bondholders to the preferred equity holders – who were not entitled to it – all to Platinum's benefit.

After a nine-week trial, a jury convicted Nordlicht and Levy on the charges related to the Black Elk Scheme, but after the verdict, they both moved for judgments of acquittal or, in the alternative, for new trials. The district court denied Nordlicht's motion for a judgment of acquittal, but granted his motion for a new trial, and also granted Levy's motion for a judgment of acquittal, reasoning that the government failed to meet its burden of proving beyond a reasonable doubt that Levy had criminal intent. The government appealed both orders.

Levy’s criminal intent. The district court considered the evidence and found it either “too speculative” or insufficient to sustain a guilty verdict, emphasizing that there was nothing inherently unlawful about structuring a transaction to avoid a claw-back or ‘”processing wire transfers, which are a routine aspect of transactions like the Renaissance Sale.” Similarly, the district court reasoned that the emails presented at trial adduced no evidence that Levy considered Beechwood to be an affiliate of Platinum; played any role in shifting Black Elk bonds to Beechwood; or played any role in Beechwood voting its bonds. Furthermore, there was testimony that Levy had been present when individuals discussed how Beechwood was not a Platinum affiliate.

However, the appeals court disagreed, finding that the agreement to participate in a conspiracy may be inferred from the facts and circumstances of the case, and both the existence of the conspiracy and the defendant's participation in it with the requisite criminal intent may be established through circumstantial evidence.

Nordlicht’s motion. With respect to Nordlicht's motion for a new trial, the district court had reasoned that while the evidence suggested that he knew about the affiliate rule, restricting permitted amendment to the Indenture, he went to great lengths to comply with it, and that even if the jury could fairly conclude that the Beechwood entities were affiliates, there was insufficient evidence that Nordlicht was on notice of their affiliate status.

Again, the appeals court disagreed, finding that Black Elk—as the issuer—as well as entities that controlled, or were under common control with Black Elk, were not entitled to have their votes counted in determining whether a majority of bonds consented to any proposed amendment. Furthermore, the Indenture defined the terms “affiliate” and “control,” leaving it undisputed that Platinum controlled Black Elk, and, that Beechwood was also under the common control of Platinum, such that it also constituted an affiliate of Black Elk.

For the foregoing reasons, the appeals court vacated the district court’s grant of acquittal and for a new trial and remanded for further proceedings.

The case is No. 19-3207-cr/19-3209-cr.

Attorneys: Lauren Howard Elbert, U.S Attorney's Office for the Eastern District of New York, for the United States. Michael S. Sommer (Wilson Sonsini Goodrich & Rosati, PC) for David Levy.

Companies: Black Elk Energy Offshore Operations, LLC; Renaissance Offshore, LLC; Platinum Partners L.P.

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