Sunday, April 21, 2013

Rothstein Judge Rejects Materials on Victim-Payment Plan


By Susannah Nesmith and David Voreacos
April 12, 2013
A plan to repay victims of the $1.2 billion Ponzi scheme run by disbarred Florida attorney Scott Rothstein is on hold after a judge rejected disclosure materials explaining the proposal.

U.S. Bankruptcy Judge Raymond B. Ray, who is overseeing the liquidation of Rothstein’s law firm in Fort Lauderdale, today ordered a hearing on a motion to end the Chapter 11 case and appoint a new trustee under Chapter 7.

Several groups of investors oppose the plan by current trustee Herbert Stettin, which included a settlement with Toronto-Dominion Bank. (TD) The plan would bar investors from suing TD Bank and halt pending state-court lawsuits against the bank.

Ray today ordered Stettin to present the so-called bar order for a separate review. Any amended disclosure statement can’t say Rothstein’s victims will be paid in full, Ray said.

“This plan is not going forward,” Charles Throckmorton, an attorney representing Rothstein victims who opposed the plan, said in an interview. “If they continue to try to get this bar order that we believe is unlawful and improper, they have to get that approved or denied on its merits.”

Stettin’s attorney, Paul Singerman, said Ray’s ruling didn’t mean the bar order was dead. He questioned the victims’ insistence on pushing to convert the case to Chapter 7.

‘Retaliatory’ Litigation

“To the extent that the very same parties who are expressing a great concern about the expense of litigation want to spend money to try that issue in the view of the performance of this trustee, that will be their call,” Singerman said in an interview. “I believe the trustee litigation is retaliatory and strategic.”

Stettin’s plan included a provision for TD Bank, Canada’s second-largest lender, to pay as much as $72 million to remove the threat of litigation over claims it aided Rothstein’s fraud. Rothstein is serving 50 years in prison.

TD Bank, based in Toronto, previously reached settlements requiring it to pay $263.7 million to investors, and lost a $67 million verdict in the only case to go to trial.

Attorneys for some of the victims said Stettin’s claim to be able to repay 100 percent of losses was unrealistic.

50 Percent

“They will pay 50 percent of the creditors 100 cents on the dollar and eliminate everybody else,” Bill Scherer, who represents 80 investors claiming $228 million in losses, said in an interview before today’s hearing.

Scherer negotiated the largest settlement with TD Bank, getting $170 million for a group who claimed losses of $182 million. The settlement sets aside $50 million for lawyers.

Rothstein’s Ponzi scheme, the largest in Florida history, was run from his Fort Lauderdale law firm and involved wealthy investors buying stakes in what he said were payouts in confidential sexual-harassment and workplace-bias cases.

The cases were fabricated. Rothstein used forged court documents and phony bank records to sell the scheme to investors, including hedge funds and South Florida businessmen. At least 10 people, including Rothstein’s wife, were convicted of crimes.

TD Bank was sanctioned in August by a federal judge in Miami who said it “willfully” concealed evidence relevant to the trial over whether it aided the Ponzi scheme. She ordered a finding that the bank’s fraud alerts and monitoring systems were “unreasonable and that TD Bank had actual knowledge of Rothstein’s fraud.”

Ruling Cited

That ruling has been cited in many objections to Stettin’s plan by investors who contend they can use it to wrest more punitive damages out of the bank.

Beyond barring all other claims against the bank, Stettin’s plan would reduce the amount investors can get by the gross amount of any settlements they have already received, Scherer said. He said that would be unfair to his clients.

“We paid the money to bring TD Bank to its knees and now we’re being punished for it,” he said.

The investors who object to the plan claim to represent $400 million of $470 million in claims.
Some of Rothstein’s victims support the bankruptcy plan.

“I’ve dealt with Ponzi scheme after Ponzi scheme and this is the first time I’ve ever seen a Ponzi scheme in which the victims stand to recover 100 cents on the dollar,” said attorney Paul J.

McMahon, who represents a group of investors, including an ailing man in his 80s.

Overrule Urged

McMahon urged Ray to overrule the objections, in part so his elderly client can get his money back as soon as possible.

TD Bank disputes Scherer’s claims that he will be able to win punitive damages, or any damages at all, in three lawsuits he filed in state court.

The investors who filed those suits “had no direct contact whatsoever with TD Bank and never reviewed or relied on any alleged TD Bank representations in deciding to invest in Rothstein’s scheme,” the bank claimed in court papers. 

Stettin has recovered $83 million and has settlement agreements for another $40 million, according to court documents he filed. The U.S. Attorney’s office has recovered at least $40 million in a forfeiture case, Scherer said.

Before the hearing, Singerman said the plan is the most equitable.

Rothstein’s scheme imploded in the fall of 2009. After briefly fleeing to Morocco, he returned to South Florida and surrendered to authorities. He pleaded guilty to five counts of money laundering, fraud and racketeering in 2010.

His wife, Kimberly Rothstein, is set to be sentenced in July after pleading guilty in February to conspiring to hide jewelry, including a 12-carat diamond, that her husband had given her. After her husband’s plea, she was required to turn over millions of dollars in valuables to federal authorities.

The bankruptcy case is In re Rothstein Rosenfeldt Adler, 09-bk-34791, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale). The criminal case is U.S. v. Rothstein, 12- cr-60204, U.S. District Court, Southern District of Florida (Fort Lauderdale).

To contact the reporters on this story: Susannah Nesmith in Fort Lauderdale, Florida, at; David Voreacos in Newark, New Jersey, at

To contact the editor responsible for this story: Michael Hytha at

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