Federal Criminal Defense Blog : Georgia Federal Criminal Defense Lawyer & Attorney : Gillen Withers & Lake Law Firm : White Collar Crime, RICO, Trial : Atlanta, Savannah, GA

Since last year, we've followed the government's investigation and prosecution of Texan and Antiguan financier Sir Robert Allen Stanford for allegedly defrauding investors of billions in a Ponzi scheme. Well, as set forth in a 150 page Report of Investigation by the U.S. Securities and Exchange Commission Office of the Inspector General (OIG), the SEC has been following Stanford and his companies for much, much longer. OIG made the Report public yesterday. The Report reveals a stunning pattern of lack of diligence in SEC enforcement.

Stanford's investment advisor registered with the SEC in 1995. By 1997, the SEC's Fort Worth Office Examination Group had conducted an examination and concluded that the CDs Stanford and his companies were marketing were most likely a Ponzi scheme and that Stanford was allegedly engaging in fraud. However, despite the fact that the 1997 examination concluded that Stanford was likely engaging in a Ponzi scheme and referred the matter to the Fort Worth Office Enforcement Office, Enforcement staff did not open an investigation, or "matter under inquiry" (MUI), until May 1998. Enforcement sent Stanford Group Company (SGC) a voluntary request for documents. SGC refused to provide many of the requested documents, and the MUI was closed in August 1998.

The Examination Group conducted another examination of Stanford in 1998, and again concluded that the investments being offered by Stanford were highly suspicious. However, Enforcement staff did not listen to the Examination Group or review its report in deciding to close the investigation of Stanford and his companies.

A third examination of SGC was conducted in 2002 and once again concluded that the consistent above-market returns claimed by SGC were highly unlikely to be legitimate investments. The SEC again did not follow up on the examination, despite receiving conflicting representations from SGC regarding its due diligence and a growing number of complaints from outside entities confirming their suspicions.

In October of 2003, the SEC received a letter from the National Association of Securities Dealers (NASD) stating that Stanford's companies were engaged in an alleged massive Ponzi scheme. The Examination Group was asked to conduct a fourth investigation, which it did in October 2004. The investigation concluded that the CDs were part of "a very large Ponzi scheme." However, in March of 2005, senior Enforcement officials in Fort Worth learned of the Examination Group's fourth examination of Stanford and told them that "[Stanford] was not something they were interested in.”

Shortly thereafter, the head of Enforcement for the Fort Worth Office stepped down. The former head later sought to represent Stanford himself in proceedings by the SEC, despite the fact that he was involved in quashing the investigation of Stanford and his companies.

Enforcement sent Stanford International Bank (SIB) a second voluntary request for documents in August 2005. SIB refused to produce the requested documents. In November of 2005, Enforcement again closed its investigation of Stanford and his companies.

After the exposure of the Ponzi scheme of Bernard Madoff in December 2008, the SEC began to receive complaints regarding the fact that it had allowed Stanford and his companies to continue to engage in a Ponzi scheme. The SEC finally shut down Stanford's companies and froze their assets in February 2009. In October of 2009, Senator David Vitter and Senator Richard Shelby wrote a letter to the SEC asking it to conduct a comprehensive inquiry into its investigation and handling of the Stanford matter.

The OIG Report found that Enforcement staff were reluctant to pursue cases which were novel or complex, preferring to focus on cases which were "quick hits" or "slam dunks." The Report notes that, in the 12 years between the time that the SEC first gained knowledge that Stanford and his companies might be engaging in a Ponzi scheme and the time that the SEC took action to freeze their assets, investments in Stanford's CDs grew from $250 million to $1.5 billion. A survey was taken of investors in Stanford's scheme with 95% responding that knowledge of an inquiry by the SEC would have affected their decision to invest.

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Of course we knew it was coming, but disbarred Fort Lauderdale attorney Scott Rothstein, architect of a $1.2 billion Ponzi scheme selling phony interests in settlements in employment and civil cases, pled guilty today in the U.S. District Court for the Southern District of Florida to charges of racketeering, fraud and money laundering,

and various other sources. Rothstein was also charged with taking monies from client trust accounts and making unlawful campaign contributions to politicians. Former attorneys and employees of Rothstein's former law firm, Rothstein Rosenfeldt Adler, are currently being investigated for illegal campaign contributions.

Following his surrender to authorities last fall, Rothstein assisted authorities in locating assets. His sentencing hearing has been set for May 6.

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In response to allegations uncomfortably similar to those against former New York celebrity lawyer and arch Ponzi-schemer Marc Dreier, Fort Lauderdale attorney Scott Rothstein, head of Rothstein, Rosenfeldt and Adler, P.A., appeared in response to a criminal information in the U.S. District Court for the Southern District of Florida on Tuesday. The information charges Rothstein with one count of Racketeering Conspiracy, in violation of 18 U.S.C. § 1962(d); one count of Money Laundering Conspiracy, in violation of 18 U.S.C. § 1956(h); one count of Mail and Wire Fraud Conspiracy, in violation of 18 U.S.C. § 1349; and two counts of Wire Fraud, in violation of 18 U.S.C. § 1343, as well as criminal forfeiture, U.S. v. Rothstein, 0:09-cr-60331-JIC.

According to the criminal information, available here, from about 2005 through November 2009, Rothstein, and other “known and unknown” unnamed co-conspirators, allegedly unlawfully obtained approximately $1.2 billion from investors through a Ponzi scheme (outdoing even Dreier’s scheme). The Government alleges that Rothstein used false statements, documents and computer records to induce investors to loan money to alleged borrowers based upon fraudulent and fictitious promissory notes and bridge loans. Rothstein allegedly falsely informed investors that his law firm, Rothstein, Rosenfeldt and Adler, P.A.’s, clients requested short-term financing for undisclosed business deals and that the clients were willing to pay high rates of return for loans negotiated by Rothstein.

Rothstein also allegedly told investors that they could purchase at a discount confidential settlement agreements in sexual harassment and whistleblower cases in amounts ranging from hundreds of thousands of dollars to millions of dollars. Rothstein allegedly falsely represented that the settlement agreements would be repaid to the investors at face value over time. Rothstein allegedly represented to investors that the settlements were highly confidential in order to protect the reputations of the companies and executives involved; that the plaintiffs preferred to settle the claims rather than purse them in a public forum; that Rothstein, Rosenfeldt and Adler, P.A., would disburse the investors’ funds to the plaintiffs; that the firm would make payments to the investors pursuant to the payment schedules in the alleged settlement agreements; that the funds were maintained in designated trust accounts for the investors in accordance with the rules and regulations of the Florida Bar and were verified by independent sources, as well as numerous other alleged false statements regarding the settlement agreements, investment funds and the firm.

To effect the fraud, Rothstein allegedly established numerous trust accounts in Rothstein, Rosenfeldt and Adler, P.A.’s name; falsified statements from financial institutions and manufactured online banking information allegedly showing investors’ monies; created false and fictitious settlement agreements and other documents. Among the alleged false and fictitious documents was a court order in a case, purportedly signed by a Federal District Judge, which falsely alleged that Rothstein, Rosenfeldt and Adler, P.A.’s clients had prevailed in a lawsuit and were owed $23 million, when in fact the firm had settled the case without the clients’ knowledge and had obligated them to pay $500,000 to the defendant.

The information also alleges that Rothstein allegedly falsely told clients that, in order to recover funds, they had to post bonds to be held in Rothstein, Rosenfeldt and Adler, P.A.’s trust account. Over several years, clients wired approximately $57 million to a trust account controlled by Rothstein. Rothstein allegedly created another false Federal court order to conceal the scheme, providing that the funds were to be returned to the clients by a later date.

Rothstein used the funds acquired through the alleged scheme to fund the operations of Rothstein, Rosenfeldt and Adler, P.A., and to expand the firm. The firm grew to employ approximately 70 attorneys. Rothstein is alleged to have laundered the funds from the scheme through corporations, contributions and large bonuses and gifts to employees. The information alleges that Rothstein used the funds to make contributions to Federal, State and local political candidates in a manner designed to conceal the source of the funds and to circumvent Federal and State limits on campaign contributions; for charitable donations; to purchase controlling interests in restaurants in South Florida; and to hire members of local law enforcement to provide security for Rothstein, Rosenfeldt and Adler, P.A., and for Rothstein personally.

The enormous wealth amassed by Rothstein through the alleged scheme is apparent in the Governement’s forfeiture allegations, which seek forfeiture not only of a sum of $1.2 billion, but also of 24 properties in Fort Lauderdale, Lauderdale by the Sea, Boca Raton, Hollywood and Plantation, Florida; New York City and Narragansett, Rhode Island, including Rothstein’s 10% ownership in the Miami Beach mansion of late fashion mogul Gianni Versace, “Casa Casuarina.” Forfeiture is also sought of numerous business interests, bank accounts and jewelry, as well as 24 vessels and vehicles purchased by Rothstein, including a 55 foot yacht.

The Government also lists millions in political and charitable contributions by Rothstein which it seeks forfeiture of, including contributions to the Republican Party of Florida; Florida Governor Charlie Crist; Democratic Chief Financial Officer Alex Sink, who is running for governor; and two hospitals.

As reported in the Miami Herald here, and here, Rothstein started Rothstein, Rosenfeldt and Adler, P.A., in 2002 as an obscure attorney practicing employment law. Over the next six years, his net worth grew from about $160,000 to tens of millions. Rothstein used flashy wealth and connections in the Broward County social and business communities to lure wealthy persons to invest in his schemes. He befriended the rich and famous, including NFL Hall of Famer Dan Marino

George G. Levin, a wealthy Fort Lauderdale resident and hedge fund manager, gave $656 million to Rothstein to invest in settlements purportedly worth $1.1 billion. Levin helped Rothstein market investments in employment and sexual harassment lawsuits to investors, although he is not alleged to have been complicit in Rothstein’s crimes. Another of Rothstein’s clients, car-dealership mogul Ed Morse, claims that Rothstein defrauded him of $57 million, arising from the settlement of a contract dispute with an interior decorator.

Rothstein would allegedly give large bonuses to employees of Rothstein, Rosenfeldt and Adler, P.A. on the condition that they make campaign contributions to political candidates who Rothstein would specify. The Government has stated that the recipients of the political contributions have returned the contributions. The Florida Democratic Party has returned $200,000 and the Florida Republican Party has given back $150,000. After Crist won the Governor’s race in 2006, he appointed Rothstein to a panel which nominates Broward County judicial candidates. The Florida Democratic Party has called for an investigation of Crist. Rothstein also allegedly paid gratuities to local law enforcement officers to avoid scrutiny.

Rothstein’s scheme began to unravel over Halloween weekend, when investors began calling the firm for overdue payments and discovered the fraud. Rothstein fled to Morocco in October, taking $400,000 to $500,000 in cash with him and wiring $16 million to Casablanca. Rothstein reportedly sent e-mails to members of his firm that he was contemplating suicide, but he returned to the U.S. on a private jet in early November. He met with Federal authorities and provided details regarding his Ponzi scheme. FBI and IRS agents raided Rothstein, Rosenfeldt and Adler, P.A.’s law offices, and seized Rothstein’s real and personal property. Rothstein agreed to waive indictment, an indication that he is cooperating with the Government, although Rothstein’s counsel has denied that he has any deal with the Government.

The Government’s information does not name Rothstein’s alleged co-conspirators, however news reports suggest members of Rothstein's inner circle at the law firm, and officers at Toronto Dominion Bank, where the investor trust accounts were held.

Rothstein’s alleged Ponzi scheme has been called the largest in the history of South Florida by Federal officials. The Florida Bar has disbarred Rothstein for stealing from the firm’s trust account. Rothstein, Levin and TD Bank are also being sued by a group of investors for more than $100 million.

Rothstein appeared in court on Tuesday in casual attire with a confident demeanor and pled not guilty to the information. U.S. Magistrate Judge Robin Rosenbaum ordered Rothstein jailed pending trial based on Rothstein’s flight to Morocco. Rothstein is represented by attorney Marc Nurik, oddly of Rothstein, Rosenfeldt and Adler, P.A. He faces up to 100 imprisonment if convicted.

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