Hedge fund manager convicted in vote-rigging scheme

A former hedge fund manager was convicted on securities fraud charges in connection with a scheme to secretly take control of a company’s bonds in order to rig an investor vote — generating a huge payday for the scheme’s participants when the company sold off certain assets.

Daniel Small was found guilty today in a Brooklyn court by a federal jury of securities fraud and conspiracy for his role in defrauding Black Elk Energy bondholders. Small is a former portfolio manager with New York-based hedge fund firm Platinum Partners LP.

According to U.S. authorities, Small, along with two others at the firm, orchestrated a scheme to defraud investors by secretly taking control of a majority of Black Elk bonds — $98 million worth of its $150 million outstanding bonds — in order to rig an investor vote, which gave priority to the company’s preferred equity investors over the bond investors when it sold off certain oil fields. All figures are in U.S. currency.

The hedge fund and certain Platinum insiders owned the company’s preferred equity — and, thanks to the rigged vote, they collected millions of dollars when Black Elk Energy sold off assets.

The company’s independent bondholders overwhelming voted against the change, but they were outnumbered by the hedge fund insiders that had secretly taken majority control of the company’s bonds.

One of those investors “testified that bondholders would never knowingly give up being ‘as senior as possible in the capital structure’ for ‘nothing’ in return,” the U.S. Department of Justice (DoJ) reported — noting that the investor characterized that as an “irrational choice.”

“This scheme was artfully concealed through what appeared to be a series of legitimate events. Nonetheless, it was an outright multi-million dollar theft from innocent victims,” said Daniel Brubaker, inspector in charge with the U.S. Postal Inspection Service (USPIS), in a release.

Two of Small’s co-conspirators in the scheme — Mark Nordlicht, the founder and chief investment officer of Platinum, and David Levy, the firm’s co-CIO — have already been convicted for their parts in the scheme. Levy and Nordlicht are awaiting sentencing.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.