For more than a decade, Platinum Partners reported some of the biggest gains in the hedge-fund industry, even as many of its investments seemed to go horribly wrong.

Now, federal prosecutors in Brooklyn say the $1.7 billion hedge fund’s industry-beating returns were based on lies. On Monday, co-founder Mark Nordlicht and six associates were charged with fraud. They’re accused of inflating the book value of unprofitable oil projects to make the fund’s performance look better.

“In the end, Platinum held no more value than a tarnished piece of cheap metal,” Brooklyn U.S. Attorney Robert Capers said at a news conference. “Nordlicht and his cohorts engaged in one of the largest and most brazen investment frauds perpetrated on the investing public, earning Platinum more than $100 million in fees during the charged conspiracy.”

Mr. Nordlicht, 48, a former commodities trader, founded New York-based Platinum in 2003, with seed money from Murray Huberfeld, a penny-stock trader from Brooklyn whose family owned kosher restaurants. The fund reported 17% average gains through 2015, with no down years, even as it invested in two Ponzi schemes and several other ventures that ended in sanctions for the other people involved.

OFFICE RAID

It all started to unravel in June when Mr. Huberfeld was arrested in a separate case for allegedly bribing the head of New York City’s corrections officers’ union to put its retirees’ savings into Platinum. The charges in that case depicted Platinum desperately trying to get money from new investors to pay off old ones. Brooklyn prosecutors raided Platinum’s offices two weeks later, looking more broadly at whether the fund was a fraud.

The charges on Monday relate to two oil ventures that Platinum claimed were its most valuable holdings, Golden Gate Oil and Black Elk Energy. Platinum claimed they were worth $292 million as of the end of 2014, about 37% of its main fund’s assets, according to prosecutors.

In reality, Golden Gate was a flop that never produced much oil, people familiar with the matter said in August. Black Elk Energy is now in bankruptcy and facing criminal charges in connection with an explosion that killed three workers.

Based in large part on the inflated value of those assets, Platinum reported profits of about 10.75% in 2014 and 8.75% in 2015, prosecutors said. That allowed Platinum’s management to extract more than $91 million in incentive fees from 2012 to 2014, according to prosecutors.

Montieth Illingworth, a spokesman for Platinum, declined to comment.

FEDERAL INDICTMENT

Prosecutors also charged David Levy, 41, co-chief investment officer, and Uri Landesman, 55, former president of Platinum’s signature fund, with securities fraud, conspiracy and other crimes, according to the eight-count indictment. The others charged were Joseph SanFilippo, chief financial officer, Joseph Mann, marketing employee, Daniel Small, managing director, and Jeffrey Shulse, Black Elk’s chief financial officer.

All seven men were arrested and are scheduled to appear in federal court later on Monday. Andrew Levander, a lawyer for Mr. Nordlicht, Michael Sommer, a lawyer for Mr. Levy, Guy Petrillo, a lawyer for Mr. Landesman, Seth Levine, a lawyer for Mr. Small and F. Andino Reynal, a lawyer for Mr. Shulse, didn’t immediately return voicemail messages seeking comment about the arrests. Lawyers for Mr. SanFilippo and Mr. Mann couldn’t immediately be determined.

“Platinum never disclosed to investors and prospective investors that it was using new investments to pay redemptions,” according the indictment that was unsealed Monday. “To the contrary, throughout 2014, Platinum continued to to inform investors and prospective investors” that fund has a “positive outlook.”

In addition to the criminal charges, the Securities and Exchange Commission filed a parallel civil case against the men on Monday, with similar allegations. Platinum used misrepresentations to attract new investors while the fund was struggling, during what internal documents described as “Hail Mary time,” according to the SEC.

BANKRUPTCY FILING

Cayman Island liquidators for Platinum’s flagship fund filed a Chapter 15 bankruptcy petition on Oct. 18 and asked a judge to prevent anyone from disposing of the hedge fund’s assets without their permission.

At one point in December 2015, Mr. Nordlicht considered fleeing the country, according to federal prosecutors.

“(My wife) is literally making me get on Israel flight if we don’t connect and agree what we are doing,” Mr. Nordlicht wrote in an e-mail to a colleague. “You should get on the flight if there is no (bridge) loan,” the colleague replied. “Going to be very rough, big shame.”

The case is U.S. v Nordlicht, 16-cr-640, U.S. District Court for the Eastern District of New York (Brooklyn).