Before federal agents raided the offices of Platinum Partners in June, the $1.2 billion hedge fund had been reporting robust returns, thanks partly to oil fields it owns in California.
Platinum counted the oil fields as its most valuable asset, worth many times what it paid for them, according to its most recent audited financial statement.
But the project was a flop that never produced much oil and wasn’t worth nearly as much as Platinum said, according to three people who were involved with the operation and who asked not to be named discussing the private business.
Whether Platinum properly accounted for hard-to-value assets, including the oil fields, is at the center of a probe by federal prosecutors in Brooklyn, according to a person with direct knowledge of the matter. Illiquid assets like the oil fields accounted for about $800 million of the firm’s main fund at the end of 2014, according to the financial statement.
Platinum, which has reported average annual returns of 17 percent since 2003, reassured investors after the raid that its valuations are accurate and they’ll get all their money back, plus gains.
Montieth Illingworth, a spokesman for Platinum, declined to comment for this story, as did a spokeswoman for Brooklyn prosecutors.
Focus on Lending
Mark Nordlicht, a commodities trader, founded Platinum in 2003, with seed money from Murray Huberfeld, a penny-stock trader from Brooklyn whose family owned kosher restaurants.
Huberfeld was well-connected in New York’s orthodox Jewish community and raised money from some of its wealthiest families.
Huberfeld was arrested in June for allegedly bribing a union chief to invest in Platinum and pleaded not guilty. Nordlicht has not been accused of wrongdoing.
Platinum’s specialty was making secured loans at high interest rates, some to risky companies like payday lenders, and taking stakes in borrowers.
By 2012, Platinum’s initial investors had quadrupled their money.
Platinum had been lending to energy companies, and with the price of crude rising in 2012, Nordlicht decided it was time to take a more active role in drilling. Oil had more than doubled from its 2008 lows to about $100 a barrel.
In April 2012 Platinum spent an initial $6.5 million to buy into Golden Gate Oil, a 2,000-acre string of oil fields in California’s Santa Maria Valley, about 150 miles northwest of Los Angeles.
The fields had been drilled extensively by Unocal Corp., now part of Chevron Corp., which abandoned them in the 1980s.
The plan was to drill in new locations between some of Unocal’s more widely spaced wells, said Stephen Lieberman, a petroleum engineer who helped put the Golden Gate deal together and then consulted for the firm for a few years. Golden Gate didn’t return messages seeking comment.
Nordlicht visited the fields several times to meet with the oil men and discuss the drilling plans, Lieberman said.
The hedge fund founder wasn’t an expert on the engineering but believed in the project’s potential, he said.
“I had to train this guy, Nordlicht, on what he was doing and why we were doing it,” Lieberman said. “He picked it up like crazy.”
Platinum commissioned a report by oil appraiser DeGolyer and MacNaughton.
The firm said in its 2013 report that the fields held 16 million barrels of proven reserves worth more than $600 million. DeGolyer and MacNaughton declined to comment.
A reserve estimate measures how much oil can be profitably extracted from a field at current prices.
If drilling proves more difficult than expected, or prices drop, an explorer might not be able to produce that much.
Golden Gate drilled six wells in 2012, but only one ever produced more than a token amount of oil, records from California’s oil regulator show. To boost production, the company decided to start drilling horizontally — wells that started downward, then curved to approach the oil from the side.
Two J-shaped wells were drilled in January and February of 2014. Oil workers missed the payload because they couldn’t turn the drill hard enough to reach it, Lieberman said.
Platinum spent several million dollars in preparing to drill these wells and Nordlicht got angry when he learned of the failure, Lieberman said. Nordlicht then fired Golden Gate’s chief executive.
Valuing Oil Assets
The drilling problems weren’t mentioned in June 2014 when Sterling Valuation Group Inc. prepared one of the periodic reports on Platinum’s portfolio that the hedge fund used to calculate its results. Sterling Valuation said Platinum’s stake in Golden Gate was worth $176 million as of March 31.
Sterling said in the report that Platinum told it that Golden Gate’s eight wells were producing around 60 barrels each per day as of the end of March.
That’s a lot more than the production figures in the California records.
They show seven of the eight wells were idle for the first three months of 2014, and the one active well produced 36 barrels a day. In 2013, Golden Gate’s total production averaged 41 barrels per day.
The three people who were involved with the operation said the Sterling valuation was too high. One of them estimated the oil fields would have fetched about $10 million at the time.
Sterling, which stopped working for Platinum last year, said in a statement that its valuation report was based on information largely provided by Platinum and the DeGolyer and MacNaughton report.
“If Platinum Partners and others provided incomplete or inaccurate information, then we would no longer stand by the report,” the statement said.
A person close to Platinum said that its valuations have always been conservative and the reserves are still worth hundreds of millions of dollars.
None of the hedge fund’s independent consultants and auditors have raised issues with Platinum’s valuations, the person said.
Platinum may have spent $50 million on Golden Gate overall, said the person, who asked not to be named because of the federal investigation.
The DeGolyer and MacNaughton report was based on the assumption oil would stay above $90 through 2032. But the price started to collapse in August 2014, dropping to $53 a barrel by December.
The decline caught oil and natural gas producers by surprise, prompting many to write down the value of their assets.
By the end of 2014, Platinum had shaved the value of its Golden Gate equity by 20 percent to $140 million, according to the financial statement.
Golden Gate hasn’t drilled any more wells, and all production stopped last year, the state records show.
“Oil prices are going to go back up and it will be hugely valuable,” said Lieberman, the engineer. “You wouldn’t develop it economically right now at current prices, but you’d never sell it.”
Bart Schwartz, who oversaw payments to investors in Bernard Madoff’s Ponzi scheme, is directing Platinum’s orderly liquidation, and payments are expected to begin next year.
Nordlicht has told potential buyers of the fund’s assets that he’s in no rush to sell.