Two years ago, Senior Health Insurance Co. of Pennsylvania hired
an investment adviser that swiftly invested tens of millions of
dollars of the insurer's money with hedge-fund firm Platinum
Partners and bought a series of hard-to-sell assets from Platinum's
funds.
What the insurer wasn't told was that the adviser, Beechwood Re,
was more than 40%-owned by family members of Platinum's co-founders
through trusts and by a former Platinum staffer, people familiar
with the matter said.
Platinum now is under a federal fraud investigation, and Senior
Health Insurance of Pennsylvania, known as SHIP, is working to get
rid of many Platinum-related assets, SHIP's chief executive
says.
The CEO of Beechwood, Mark Feuer, said he didn't tell SHIP and
other clients about his firm's ties to Platinum because the
ownership stakes were passive and didn't come with a management
role. A Beechwood spokesman later said the firm "believes in the
importance of all appropriate disclosures and at all times has
acted in the best of interest of its clients."
As The Wall Street Journal reported in July, Platinum, which
specializes in exotic investments such as loans to struggling
companies, is being investigated by federal prosecutors in New
York. One of its founders, Murray Huberfeld, has pleaded not guilty
to conspiracy and wire fraud in connection with an alleged bribe of
a union official for investments. Platinum has suspended
redemptions from its hedge funds and announced plans to liquidate
them. It has said it is cooperating with the investigation.
Platinum's fund investors have been largely concentrated in a
tight-knit group of observant Jewish businesspeople. Exposure to
Platinum reached a far wider realm as a result of Beechwood's
having directed insurance-client money into Platinum funds and
related investments.
SHIP's Platinum-linked investments, which have included loans to
Platinum itself, exceed the insurer's shrinking $35 million capital
surplus, or assets minus liabilities. A long-term-care insurer,
SHIP counts on its investments to help cover the cost of benefits
for elderly policyholders.
Both Beechwood and SHIP said investments are supported by
independent ratings and backed by collateral. They said Beechwood,
not SHIP, would bear the risk on them. SHIP said its capital levels
will remain adequate.
Since early 2014, Beechwood has put more than $200 million of
client money in Platinum-linked investments, according to public
filings and people familiar with the matter.
Beechwood said all transactions related to Platinum since late
2014 have been "in the context of a restructuring away from
Platinum," a process "nearly complete." It didn't provide specific
details of the restructuring.
Beechwood said in August that transactions with Platinum
"represent under 10% of our well-capitalized $2.4 billion business
and should be down to under 1% by the end of the year."
Beechwood was founded in 2013 by two former Merrill Lynch
operations executives, Mr. Feuer and Scott Taylor, partly to help
insurers invest their cash.
Mr. Feuer had long known some at Platinum, whose executives were
active in the same religious community on New York's Long Island.
He and Mr. Huberfeld served at a charity together, and Mr. Feuer's
sister went to the same school as Beechwood co-founder Mark
Nordlicht, according to people familiar with the matter.
For years, Platinum had little success attracting
insurance-company money and considered starting a reinsurer to do
so, people familiar with the situation said. It didn't proceed, but
after Messrs. Feuer and Taylor opened Beechwood Re, more than 40%
of Beechwood's equity was held by family-member trusts of
Platinum's founders as well as by a former Platinum employee.
That employee, David Levy, who is a nephew of Mr. Huberfeld,
became Beechwood's first chief investment officer. He later
returned to Platinum. Then another Platinum employee became
Beechwood's second chief investment officer in 2015.
In other ties, Beechwood hired family members of Platinum's
owners, and it gave Mr. Huberfeld access to an office at its New
York quarters in 2015.
Mr. Feuer said opening Beechwood was his and Mr. Taylor's own
idea, and the Platinum-linked owners were bought out this summer or
earlier. He said Beechwood now is owned by himself, Mr. Taylor and
an investor he wouldn't name but who he said has no financial
interest in Platinum.
Before family trusts of Mr. Huberfeld and Mr. Nordlicht were
bought out, they were kept updated. Less than 10 minutes after
Beechwood received word that money for its first transaction had
arrived, Beechwood's founders notified Messrs. Nordlicht and
Huberfeld, documents reviewed by the Journal show.
A spokesman for Beechwood, David Goldin, said, "Everyone close
to minority investors was notified at the same time."
The initial Beechwood transaction, in February 2014, was a
reinsurance deal with CNO Financial Group Inc.—an insurer from
which SHIP was spun out—to manage about $500 million of
long-term-care policies.
CNO audited $126 million of that total, it said in a filing last
month, and believes "some or all of these assets may bear some
connection to Platinum" or to parties with a link to Platinum.
CNO's stock is down around 10% since then. Fitch Ratings placed
CNO on a negative ratings watch, on the risk it could have to cover
any Beechwood losses.
CNO declined to comment. Speaking for Beechwood, Mr. Goldin
said, "We have no reason to believe there have been or will be any
shortfalls in the reinsurance trusts."
The Platinum-related investments Beechwood chose for clients
came in several forms: investments in hedge funds, asset purchases
from Platinum and loans to the firm or companies linked to it. One
such company was Implant Sciences Corp., an explosives-detection
firm that trades as a penny stock.
In winning SHIP, the Pennsylvania insurer, as a client,
Beechwood guaranteed a 5.85% annual return, a steep hurdle at a
time of low interest rates.
Beechwood executives said many clients asked it to find
investments that could achieve higher returns—one reason it chose
Platinum-related investments. Another reason, said Mr. Feuer, was
that Beechwood's first chief investment officer, having come from
Platinum, was familiar with its positions.
Mr. Goldin said Beechwood determines valuations for assets, and
a third-party firm "separately provides an independent view."
SHIP hasn't marked down any of its Platinum-related investments,
said its CEO, Brian Wegner.
In the first quarter, after Platinum's flagship fund said it
wouldn't immediately be able to meet redemption requests, filings
show Beechwood directed about $8 million more of SHIP's money into
Platinum-related investments. In the second quarter, Beechwood
directed that around $28 million of such investments be cashed out.
Mr. Wegner said SHIP "was not aware of the liquidity issues faced
by Platinum" at the time those moves were made.
SHIP, which has more than $2 billion of assets overall, had $57
million invested in or lent to Platinum hedge funds at the end of
last year.
Mr. Goldin said Beechwood aims to drop SHIP's investments in
Platinum hedge funds to zero by year-end.
He said Beechwood set up a separate vehicle, funded by
Beechwood's owners, to buy back clients' investments in Platinum's
hedge funds. Other Platinum-related investments, including loans to
the firm and companies close to it, are being repurchased,
restructured or refinanced using Beechwood's own money, Mr. Goldin
said.
Write to Rob Copeland at rob.copeland@wsj.com
(END) Dow Jones Newswires
September 16, 2016 01:15 ET (05:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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