Ex-Black Elk CEO Indicted In alleged Ponzi Scheme

Source: Houston Chronicle

Seven executives of hedge fund are named as well as federal prosecutors allege they operated a Ponzi scheme

A former CEO of Houston-based Black Elk Energy Offshore Operations - long embroiled in legal cases over a 2012 oil rig explosion - was indicted with seven executives of a hedge fund on charges that they engaged in a Ponzi scheme, federal authorities said.

The indictment, handed up by a federal grand jury in New York, charged Jeffrey Shulse, 44, of Houston, with securities fraud, securities fraud conspiracy and wire fraud conspiracy for allegedly defrauding Black Elk bondholders. He was arraigned Monday in U.S. District Court in Brooklyn.

Black Elk was part of portfolio that the New York hedge fund Platinum Partners touted to its investors, authorities said. The company fraudulently sold bonds and then diverted $95 million in proceeds to Platinum as a way to help the hedge fund continue its scheme, the indictment alleged. U.S. Attorney Robert Capers called the scheme "one of the largest and most brazen investment frauds perpetrated on the investing public."

Shulse could not be reached for comment.

The indictment marks another development in Black Elk's troubled history. It started the morning of Nov. 16, 2012, when a worker on a company platform off Louisiana ignited oil vapors while welding pipe, triggering a chain reaction that caused oil tanks to explode. The blast killed three workers, injured several others and spilled about 480 barrels of oil and water into the Gulf of Mexico, federal investigators said.

Families of those killed sued the company, as did injured workers and Black Elk contractors. A federal report accused the company of failing to follow proper safety practices and rushing work.

Three years later, Black Elk and one of its contractors, Grand Isle Shipyards, were charged with three counts of involuntary manslaughter, as well as eight charges involving federal safety practices under the Outer Continental Shelf Lands Act and one violation of the Clean Water Act. A trial in the case was set for January.

In June, a complex trial that combined 10 lawsuits against Black Elk ended with a settlement. Terms weren't disclosed. A month later, a U.S. bankruptcy judge approved the liquidation and dissolution of Black Elk.

Monday's indictment fleshed out two alleged conspiracies. The first accused Platinum of overvaluing oil assets such as Black Elk to fraudulently attract new investors. The money from the new investors was used to pay old investors, until Platinum ran out of cash, authorities said.

Platinum, investigators said, was supposed to be "a standard-bearer in the hedge fund industry." It reported $1.7 billion in assets under management and annual returns of more than 17 percent since it started in 2003, Capers said. The company earned $100 million in fees during the conspiracy, authorities said.

Mark Nordlicht, a founder and chief investment officer of Platinum Partners, and six other defendants were accused of lying to investors about the fund's performance. Nordlicht, 48, of New York, pleaded not guilty.

One of Platinum's biggest problems was Black Elk. Platinum valued the company at $282 million, but, after the explosion, the company wasn't making enough money to justify such a valuation, according to investigators.

The second conspiracy detailed by investigators on Monday alleged Platinum tried to sell Black Elk assets and take the money for itself, rather than paying creditors who held Black Elk bonds. By late 2013, Platinum knew Black Elk was "effectively insolvent," according to federal authorities, but still possessed certain valuable assets. The defendants then tried to sell those assets and divert proceeds to Platinum, instead of to bondholders, who should have been the first to receive the money, authorities said.

The criminal case has been assigned to Chief Judge Dora Irizarry of the United States District Court. If convicted, each of the defendants faces a maximum sentence of 20 years' imprisonment.