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Law.com Puts the Spotlight on a Bad Apple

May 4, 2010 – Law.com

Scott Rothstein ran what appeared to be a wildly successful law firm but turned out to be a $1.2 billion Ponzi scheme. Prosecutors asked District Judge James Cohn to execute a vast forfeiture plan last month seeking ill-gotten gains in the form of cash, real estate, and other goods. Meanwhile, the lawyers for Herbert Stettin, the Trustee overseeing the estate of Rosenfeldt Adler (Rothstein’s law firm) feel the Government’s reach is too broad and that something should be left over for their client to administer. “I know the intersection of federal forfeiture law and federal bankruptcy law is a treacherous one,” said Paul Singerman, the Berger Singerman partner heading the trustee’s legal team. He said forfeiture laws were designed to take race cars away from drug dealers, but “this is not that type of case.” Not so long ago, prosecutors put the bad guys away, and bankruptcy attorneys and receivers recovered money for fraud victims. But the Justice Department has expanded its mission in the past decade, and the federal docket is littered with actions such as U.S. v. One Ancient Egyptian Wooden Sarcophagus or U.S. v. $13.9 million from Wachovia. When asked whether any money will be left, once prosecutors are done with claims from fraud victims, to pay creditors of the firm, Singerman responded, “We absolutely believe there will be.” Right now, however, not a lot of money has been recovered on the bankruptcy end. Singerman told U.S Bankruptcy Judge Raymond B. Ray in April that only about $3 million has been recovered by the trustee. What makes Singerman so optimistic, however, is negotiations with bankruptcy litigation targets, such as Banyon Income Fund, which claims a $775 million investment in Rothstein’s fake settlement financing scheme, and attorneys at the firm who received bonuses or loans. Singerman has told Ray that a settlement with a major player is forthcoming, and Banyon would be a juicy target. Stettin might be looking for any money Banyon received back from the Ponzi scheme, Tew said, but the Fort Lauderdale investment company reportedly lost $300 million and positioned itself as the leading creditor.

No matter what the creditors say, RRA would have a hard time showing it was victimized. The firm was named a criminal enterprise by the U.S. Attorney’s Office in charges filed against Rothstein in December. Prosecutors charge the firm, decorated with photos of Rothstein arm-in-arm with politicians and celebrities, was a vehicle used to attract investors. Documents produced by investors were on a law firm letterhead. Investigators later found the firm couldn’t even make payroll without the lawyer’s stolen money. Under the legal doctrine “in pari delicto,” the status quo holds when two parties are equally at fault. That would leave prosecutors with only what they seize from a corrupt law firm chairman and his corrupted firm. “Rothstein was the head of a criminal enterprise. His misconduct will be attributed to the law firm. So how can the law firm turn around and sue for misconduct?” Tew asked. “What did Banyon do that Rothstein wasn’t equally or more culpable?” Fort Lauderdale attorney Maria Prunskis can offer a personal example. She filed a complaint against Rothstein’s firm April 12 to recover money as a former client. She didn’t return calls for comment. Her lawsuit claims RRA partner Russell Adler represented her after she was injured in a 2006 car accident. A settlement check was cashed by RRA last Oct. 2, weeks before the firm collapsed, but her doctors were never paid. RRA “should have known that he [Rothstein] was converting plaintiffs’ settlement money, unlawfully taking it without consent, against the will of the plaintiff,” Prunskis’ pro se lawsuit states. An April 12 motion filed by Adler shows what kind of pileup can happen at the intersection of bankruptcy and forfeiture. He told Cohn he fears he will end up having to repay a loan given to him by Rothstein twice: once to the government under forfeiture laws and another time to Stettin. Adler asked Cohn to prohibit Stettin from collecting the loan. Stettin wants Adler’s share of a New York co-op apartment that was secured with the loan. Adler contends Stettin is pursuing property that is adverse to the government and in the wrong forum. “Trustee’s position directly harms the criminal case claimants, the government, the bankruptcy estate and the Adlers,” the motion states. William Scherer of Conrad & Scherer in Fort Lauderdale, who represents investors claiming more than $100 million in losses to Rothstein, said he thinks the conflict between the criminal and bankruptcy sides of the Rothstein debacle is overstated and the victims will be the better for it in the end. He noted similar issues arose in the case involving Marc Dreier, a New York attorney convicted of masterminding a $700 million Ponzi scheme through his law firm. “The Dreier case is a mirror image of this one, just not as evolved,” Scherer said. “I think the government has a lot of Ponzi scheme experience with Madoff and Dreier, and they are trying to get as much money as they can for the victims.” But Scherer said the two Rothstein cases “need to mesh.” Akerman Senterfitt attorney Michael Goldberg, who represents the bankruptcy creditors committee, agrees prosecutors and Stettin need to get on the same page. He said the creditors hope to be able to work with both sides to “bridge the gap” through compromise. “In the cases I’ve been involved in on forfeiture, I have never come across a stalemate such as this,” Goldberg said.

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