United States v. Small

1

UNITED STATES OF AMERICA, v. DANIEL SMALL, Defendant.

No. 16-cr-00640 (BMC)

United States District Court, E.D. New York

July 6, 2023

MEMORANDUM DECISION AND ORDER

COGAN DISTRICT JUDGE

Before the Court is defendant Daniel Small's [967] motion for a judgment of acquittal under Federal Rule of Criminal Procedure 29, or in the alternative, for a new trial under Rule 33. For the reasons that follow, Small's motion is denied.

BACKGROUND

I. Procedural

The indictment in this case charged Daniel Small, Mark Nordlicht and David Levy, inter alia, with participating in a scheme to defraud bondholders of an oil and gas company Black Elk Energy Offshore Operations, LLC (“Black Elk”). The indictment alleges that, between November 2011 and December 2016, Nordlicht, Levy, and Small engaged in a scheme to defraud Black Elk bondholders and “deprive [them] of the proceeds of the sale of the vast majority of Black Elk's most lucrative assets through material misrepresentations and omissions about, among other things, Platinum's ownership and control over the [Black Elk] bonds.”

Nordlicht and Levy were tried before a jury in 2019 and convicted of securities fraud, conspiracy to commit securities fraud, aiding and abetting securities fraud, and conspiracy to commit wire fraud.^[1]Small's trial was severed from that of his co-defendants due to the unavailability of his counsel. After the verdict in the Nordlicht-Levy trial, both filed motions under Federal Rules of Criminal Procedure 29 and 33. This Court granted Nordlicht's Rule 33 motion for a new trial and granted Levy's Rule 29 motion for judgment of acquittal. United States v. Nordlicht, No. 16-cr-00640, 2019 WL 4736957 (E.D.N.Y. Sept. 27, 2019). This Court also conditionally granted Levy a new trial under Rule 33 in the event the judgment of acquittal was later vacated or reversed. The Second Circuit reversed. United States v. Landesman, 17 F.4th 298 (2d Cir. 2021). On remand, Nordlicht and Levy renewed those portions of their Rule 29 and Rule 33 motions that I had not addressed before the remand. Those renewed motions were denied. See United States v. Nordlicht, No. 16-cr-640, 2022 WL 1469393 (E.D.N.Y. May 10, 2022).

Small's trial was held in August 2022. The jury found him guilty of securities fraud and conspiracy to commit securities fraud but not guilty of conspiracy to commit wire fraud. Small now moves under Rule 29 for a judgment of acquittal or, in the alternative, under Rule 33 for a new trial.

II. Small's Trial

A. Government's Theory

In August 2014, Black Elk bondholders voted on amendments to the bond indenture that, among other things, permitted preferred equity holders to be paid from the proceeds of an asset sale (the “Renaissance Sale”). The Government's theory at trial was that Small, together with Nordlicht and Levy, rigged the bondholder vote by voting millions of dollars in bonds that they secretly controlled, despite representing to the other bondholders that no affiliates were voting on the amendments. Because Platinum, defendants, and defendants' friends and family owned much of the preferred equity, the Government claimed that defendants rigged the bondholder vote to ensure the amendment would pass and preferred equity holders could be paid millions of dollars in proceeds of the Renaissance Sale. The Government argued that Small was the “lynchpin” of the scheme by virtue of his dual role as an employee at Platinum and a board member at Black Elk, which allowed him to oversee the entire indenture process and facilitate the misrepresentations at issue.

B. Relevant Entities and Parties

Platinum Partners was a New York hedge fund founded by Nordlicht, who served as Platinum's CIO during the relevant period. Platinum consisted of various investment funds, including Platinum Partners Value Arbitrage Fund, L.P. (“PPVA”), Platinum Partners Credit Opportunities Master Fund, L.P. (“PPCO”), and Platinum Partners Liquid Opportunity Master Fund, L.P. (“PPLO”). Beechwood was a reinsurance company founded in early 2014 by Nordlicht and others. It consisted of several entities, including Beechwood Bermuda International Ltd. (“BBIL”) and B Asset Management (“BAM”). Daniel Small worked at Platinum as a portfolio manager. David Levy worked at Platinum until early 2014, when he moved to Beechwood to serve as its CIO.

One of PPVA's major investments was in Black Elk, an oil and gas company that held and managed oil and gas assets in the Gulf of Mexico. PPVA owned 85% of Black Elk, and Small served on Black Elk's board as Platinum's representative. Black Elk was primarily run by John Hoffman (CEO) and Jeff Shulse (CFO).

C. The Bond Indenture

In 2010, Black Elk issued $150 million in publicly traded senior secured bonds, on which Black Elk had to pay bondholders 13.75% in annual interest. BNY Mellon served as the bond trustee. The bonds were governed by an indenture (i.e., a contract between Black Elk and its bondholders setting forth their rights and obligations). The indenture could be amended or supplemented with the consent of a majority of the bondholders. However, when determining the number of votes needed for a majority, the indenture stated that certain bond votes would not be counted. Specifically, bonds held by Black Elk, its members, and its “affiliates” had to be excluded from the vote.

The indenture defined an “affiliate” of Black Elk as “any other [entity] directly or indirectly controlling or controlled by or under direct or indirect common control with” Black Elk. It defined “control” as “the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such [entity], whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the Voting Stock of a[n] [entity] will be deemed to be control.” Per the “affiliate rule,” entities under common control with Black Elk were conflicted out of voting on changes to the indenture. So, if Black Elk affiliates owned 50 million Black Elk bonds, only the remaining 100 million bonds could vote, and thus over 50 million “yes” votes were needed to pass an amendment by majority vote.

The indenture further provided that within 360 days of Black Elk selling any property, Black Elk had to use the proceeds of that sale for one of four purposes. In early 2014, defendants sought to amend the bond indenture to expand these categories so it could use the proceeds of the Renaissance Sale to pay off Black Elk's preferred equity. The Government alleged that defendants rigged the vote by concealing their control over a majority of the bonds to ensure that the amendment would pass so they could defraud bondholders of the proceeds of the Renaissance Sale.

D. Black Elk and Platinum's Financial Difficulties

An explosion at one of Black Elk's drilling platforms in the Gulf of Mexico in 2012 resulted in injuries and fatalities and led to cumbersome and costly regulatory oversight of Black Elk's operations. The Bureau of Safety and Environmental Enforcement began “shutting [Black Elk] in” and mandating costly updates to its facilities and operations. As a result, Black Elk was struggling financially, so in 2013, it decided to raise money by issuing some preferred equity, on which it had to pay 20% in annual interest. Among the preferred equity holders were defendants, their friends and families, and other Platinum investors.

In early 2014, Black Elk was still cash-strapped and struggling to pay its vendors. Art Garza, the former Chief Technical Officer at Black Elk, testified that he attended various Black Elk senior management meetings where management floated the possibility of declaring bankruptcy. To raise cash, Black Elk began selling some of its most valuable assets, including its oil fields. One of the buyers was a company called Renaissance Offshore, LLC, to which Black Elk would eventually sell nine oil fields in August 2014 (the “Renaissance Sale”).

On March 16, 2014, Small emailed Nordlicht regarding the state of Black Elk, recounting how “two major wells watered-out and the company had an explosion . . . which exposed its underperforming properties, bloated cost structure, poorly negotiated escrow agreements and lack of financial planning and controls.” He noted that, rather than fix these fundamental problems, Black Elk management “raised fresh capital . . . sold assets and ran-up payables.”

Nordlicht responded: “Happy to discuss . . . [t]his is also the week I need to figure out how to restructure and raise money to pay back 110 million of preferred [equity in Black Elk] which if unsuccessful, w[oul]d be the end of [PPVA]. This ‘liquidity' crunch [at PPVA] was caused by our mismanagement - yours, David [Levy] and I - of the black elk position. . . . I have been up until 3am for the last two weeks working through this issue.”

On April 16, Nordlicht forwarded to Small, Levy, and others an email reporting that there was a “shut in” at one of Black Elk's wells, so it was not producing oil. Nordlicht wrote back: “This is starting to become a major issue.” On May 20, Shulse, Black Elk's CFO, wrote to Nordlicht, Small, Levy, and others that Black Elk had a $6 million shortfall it “c[ould]n't make up” and had “royalties, hedges, payroll, insurance, rent, and other ‘have' to pays that w[ould] not be covered by the current or future oil.” Shulse wrote back, lamenting: “[I]t is not fun laying awake at night worrying about whether or not we can make payroll.”

On June 16, Nordlicht emailed Uri Landesman, Platinum's President, writing: “[W]e need to revamp the strategy on PPVA and figure out what to do. It can't go on like this or practically, [PPVA] will need to wind down. This is not a...