In the years before Mark Nordlicht was arrested for what's alleged to be one of the biggest investment frauds since Bernie Madoff's, US authorities had plenty of reasons to suspect something might have been fishy about his hedge fund, Platinum Partners.

As far back as 2007, Bank of Montreal accused Nordlicht of helping a rogue trader, costing it more than $US500 million ($687 million).

Three years later, when the Securities and Exchange Commission was investigating what it called a "scheme to profit from the imminent deaths of terminally ill patients", the agency discovered that Platinum had funded the deals.

And in 2011, a Florida lawyer who confessed to running a $US1.2 billion Ponzi scheme testified that Nordlicht, his biggest funder, lied to help him lure new investors.

And then there were the remarkable profits: 17 per cent annually on average from 2003 through 2015, with no down years. The returns were almost as smooth as the fake gains that Madoff claimed year after year, as measured by a popular metric called the Sharpe ratio.

But until Murray Huberfeld, who founded Platinum with Nordlicht, was caught up in a New York City municipal-corruption probe in June, no one at the fund had been charged with wrongdoing.

Within weeks of Huberfeld's arrest, federal agents raided Platinum's midtown Manhattan office. On December 19, Nordlicht and six others were arrested in what the government called a $US1 billion fraud.

Nordlicht and Huberfeld have pleaded not guilty, and Platinum's main fund is being wound down after filing for bankruptcy. Montieth Illingworth, a spokesman for Platinum, declined to comment.

Smooth returns

That Platinum was able to avoid scrutiny for so long illustrates flaws in the post-Madoff regulatory regime. While the SEC says it now conducts "risk-based examinations" of funds that have suspiciously smooth returns, the agency didn't do a thorough on-site audit of Platinum until 2015, according to a person with knowledge of the matter.

Judy Burns, an SEC spokeswoman, declined to comment.

"The returns alone make no sense," said Joelle Scott, who investigates money managers as senior vice president at Corporate Resolutions in New York.

"This isn't a Madoff thing where it was hard to find. This was a glaring, documented history of bad behaviour."

The fund's presentations for investors touted its top-tier auditors and "independent valuations" by an experienced consultant. But those gatekeepers relied on Platinum to provide information about its investments.

The valuation consultant says the firm never visited the California oil fields that supposedly accounted for much of Platinum's assets. Even a simple check of public records would have revealed they were barely producing oil.

Nordlicht, 48, a second-generation commodities trader, started Platinum in 2003 with seed money from Huberfeld, a penny-stock trader from Brooklyn whose family owned a chain of kosher fast-food restaurants.

Nordlicht, who has the rumpled look of a professor, was the face of the fund. Huberfeld, 56, who had been sanctioned three times for alleged securities-law violations, stayed in the background.

Little known on Wall Street, Nordlicht and Huberfeld cultivated connections in New York's Orthodox Jewish community.

Among the investors they recruited were the Gindi family, owners of the Century 21 department-store chain, and real estate moguls Ruby Schron and Abraham Fruchthandler. The Gindis, Schron and Fruchthandler declined to comment.

"You win some, you lose some," said another investor, Gordon Diamond, a meat magnate who served on the board of a Holocaust charity with Huberfeld. "I guess I should have done more due diligence."

Platinum gains

Platinum's first close call came in 2007, when Bank of Montreal discovered that a natural gas trader had been covering up huge bets, many of them with the hedge fund.

The bank was forced to liquidate the trades, resulting in big gains for Platinum, among others, according to Vince Lanci, who handled some of the bets as an independent trader and managed money for the fund.

The problem was that Platinum's Nordlicht was also chairman of Optionable Inc, a brokerage that, according to prosecutors, provided price quotes to the rogue trader.

Bank of Montreal sued Nordlicht, saying he helped devise the trades. Nordlicht denied knowing anything about the fraud, and the case was settled out of court.

The FBI investigated, arrested the rogue trader and charged the chief executive officer of Optionable with aiding the scheme. Both men pleaded guilty.

Nordlicht wasn't accused of wrongdoing by the government. When the Optionable CEO was released from prison in 2014, he went to work for a company controlled by Platinum.

The trades with Bank of Montreal helped Platinum record a 53 per cent gain in 2007. That attracted investors, and its main fund's assets more than doubled to $US567 million by the end of the year.

Ostrich boots

Nordlicht needed to put that money to work. That's when he found Scott Rothstein, a Florida lawyer who was promising huge returns to investors who would advance him funds against future payments from legal settlements.

Rothstein's wild spending had turned him into a Gatsby-like figure on the Fort Lauderdale charity circuit. Short and stocky, he wore pinstriped suits, loud hand-painted ties and orange ostrich boots.

Platinum and related funds advanced him more than $US100 million through a feeder fund at an annual interest rate of 50 per cent. Rothstein would later say that was so high his investors should have known something was wrong.

In 2009, he missed a payment. Nordlicht flew to Florida for a meeting, which Rothstein described in a deposition two years later, after he pleaded guilty to the fraud.

The two men sat facing each other on a couch in his office. Rothstein said in his deposition that he wasn't sure if Nordlicht knew that the lawsuits and settlements didn't really exist.

"If we go down, you go down," Rothstein recalled saying. "We're in this together."

Rothstein said Nordlicht told him his father had been investigated for fraud and that he didn't want to relive the experience. He talked about the situation with Bank of Montreal.

"He was trying to explain to me without using the words that he was a player, that he got it," Rothstein said. "He said these things only blow up when the parties start fighting."

Never charged

Rothstein said in his deposition that Nordlicht agreed to lie by giving positive references to potential investors. Over the next six months, Rothstein said, Platinum and related funds stopped advancing him money and received all but about $US20 million back as he raised cash from others.

Nordlicht was never charged in connection with the Ponzi scheme and has denied helping Rothstein, who's now in the witness protection program because he also informed on organised crime.

Nordlicht wrote to investors that Platinum, like others, was tricked by Rothstein and that the fund recovered its losses by suing a bank for its role in the scheme.

With potential losses from Rothstein's fraud averted, Platinum's main fund posted gains of 21 per cent in 2009 and 19 per cent in 2010, according to investor presentations.

That year the fund popped up on the radar of the SEC, which was investigating a scheme involving a Los Angeles rabbi who, the agency later alleged, tricked terminally ill hospice patients into providing personal information so annuities could be purchased in their names.

The annuities were funded by Platinum, which had put up more than $US56 million, according to investigation records. It spent four years building its case.

But when its enforcement actions were announced in 2014, the SEC only fined the intermediaries who ran the scheme and a shell company set up by Platinum to hold its money. Nordlicht and the fund itself weren't named or accused of wrongdoing.

Oil flop

By then, Platinum was inflating its returns by reporting false valuations for some assets, according to prosecutors in Brooklyn who brought charges last month. One of the biggest was the California oil fields.

The firm's year-end financials for 2014 valued them at about $US140 million. In reality, the project was a flop that barely produced any oil, people familiar with the matter said in August.

CohnReznick LLP, the New York accounting firm that audited Platinum's financial statements, declined to comment. The valuation agent, Sterling Valuation Group, said it was lied to by the fund and didn't check the information it was provided.

Sterling's reports noted that the valuations depended on what the fund told it, according to Eric Rose, a spokesman for the New York-based firm.

"Obviously, a more expensive valuation would involve such activities as visiting the investment location or interviewing personnel," said Rose, who added that the valuation firm isn't under investigation.

Because Platinum couldn't sell the oil fields, the fund started to depend on money from new investors to pay off those who wanted their money back, prosecutors said.

In December 2013, an intermediary introduced Huberfeld to Norman Seabrook, who controlled a pension fund as president of the New York City correction officers' union, according to prosecutors.

Huberfeld agreed to pay Seabrook a kickback if he invested his union's pension funds with Platinum, the US said. After the union put in $US20 million, the intermediary, who's cooperating with the corruption probe, allegedly gave Seabrook $US60,000 stuffed in a Ferragamo bag. Seabrook and Huberfeld pleaded not guilty.

'SEC room'

That money tided Platinum over for only a short time. "It can't go on like this or practically we will need to wind down," Nordlicht wrote in a June 2014 email cited by the SEC.

The next year, SEC lawyers conducted an examination of Platinum. They spent so much time at its offices that Nordlicht started calling a conference room "the SEC room" the person with knowledge of the matter said.

When the lawyers left by the end of the year without bringing any charges, Nordlicht told investors he'd been given a clean bill of health, the person said.

That wasn't exactly true. The SEC sued Platinum last month at the same time prosecutors filed their case and credited its examiners with uncovering suspicious activity.

Nordlicht displayed little concern when interviewed for an October 2015 Bloomberg article. In that story, hedge fund researcher Nate Anderson said Platinum displayed "red flags you can see from outer space".

Nordlicht argued that while he exploited loopholes, he always did it to earn money for the fund's investors. "We'll scour the four corners of the earth for the best risk-adjusted strategy," he said.

The next month, so many investors asked for their money back that Nordlicht was forced to admit that some of the fund's assets couldn't be sold right away. By that December, Platinum's managers were contemplating fleeing the country, according to prosecutors.

"Assume we are not coming back to ny," Huberfeld wrote in an email to Nordlicht cited by prosecutors. "We can fly straight to Europe from Miami on Tuesday. Take passport."