SEC v. Platinum Management
Posted on Categories Court Decisions, Securities/Commodities Regulation

By Jeremy Root

Legal fee agreements that undertake to indemnify corporate officers accused of wrongdoing may also provide for advancement of legal fees; the plain meaning of “shall advance” in such a provision is that advancement is mandatory, not discretionary.

SEC vs. Platinum Management, No. 16-cv-06848 (E.D. N.Y., 11/25/18).

Joseph SanFilippo, David Levy, Daniel Small, and Joseph Mann are former officers of Platinum Management (NY) LLC and its related entities (collectively “Platinum Partners”). The U.S. filed criminal indictments against these former officers shortly before the SEC commenced this enforcement action in 2016. The indictment and the SEC action both arise from the same alleged course of fraudulent conduct. The Court placed Platinum Partners under the control of a Receiver shortly after the SEC action was commenced. The former officers all have agreements that allowed or required payment of their legal fees, and, in this phase of the case, they filed a motion to compel advancement of their legal fees.

Delaware law governs the relevant agreements and construes legal fee provisions according to their plain meaning. Levy and Small are entitled to advancement of their legal fees under a Credit Funding Agreement, which provides that Platinum Partners “shall advance” their legal fees. The plain meaning of “shall advance” is that advancement is mandatory, not discretionary. Platinum Partners agreed to pay Levy’s monthly legal fees within 15 days of receipt of an invoice, which further justifies advancement for Levy. SanFilippo is entitled to advancement of his legal fees, because Platinum Partners’ in-house counsel approved his request for advancement prior to his dismissal. The PPCO Operating Agreement provided that rights to indemnification “and payment of associated expenses shall not be affected by the...removal…of the managing member.” Since SanFilippo’s right to advancement was triggered prior to his removal, the PPCO Operating Agreement blocks any modification post-removal.

Mann, however, is entitled only to indemnification, not advancement, of legal fees under the relevant agreements. Mann’s best claim for advancement arose under a Master Fund Agreement, which provides that recovery is conditional on certain requirements that were not fulfilled. Mann’s other agreements with Platinum Partners did not contain any “shall advance” requirement, so he is entitled to indemnification only of his legal fees.

Under Delaware law, claims for advancement of legal fees are treated the same as claims of other unsecured creditors. The former officers claimed a Sixth Amendment right to advance their claims ahead of other creditors. Although the Sixth Amendment protects against unjustified governmental interference with the right to defend oneself using whatever assets one has, the Sixth Amendment does not protect against the actions of a receiver, because the receiver is not a government actor. The former officers contended that there was a “sufficiently close nexus” between the SEC and the receiver, because the SEC provided significant encouragement to deny advancing their legal fees. The only evidence of such encouragement was an email from the SEC expressing the view that advancement of attorneys’ fees “ahead of other creditors is inappropriate in this case.” The SEC also expressed confidence in the receiver to make an independent judgment. “If the Court believed that the Receiver was a mere rubber-stamp for the SEC, it would remove and replace her.” As the former officers’ claims for advancement of legal fees do not have priority over the claims of other unsecured creditors, their motion to compel advancement is denied.

(J. Root) (EIC: *It all started with the arrest of Platinum founder Mark Nordlicht in December 2016, when federal prosecutors accused him and six others of bilking investors in a $1 billion fraud scheme. The criminal trial of the four Platinum Management officers started this week in Brooklyn. **We covered a prior decision in this matter, one concerning the disposition of assets by the Receiver and the need to engage professional assistance: see SOLA 2017-47.)

(SOLA Ref. No. 2019-08-08)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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