When it became clear that Ft. Lauderdale power-attorney Scott Rothstein was behind a massive Ponzi scheme, federal authorities took quick action to preserve proceeds of the fraud, seizing tens of millions of dollars of assets that symbolized Rothstein's larger-than-life persona, including more than 20 properties, exotic cars that included a $1.5 million Bugatti, 304 pieces of jewelry, and $15 million Rothstein had wired to Morocco just before the scheme's collapse. In all, the criminal forfeiture proceedings, as they are known in legal parlance, yielded approximately $50 million of assets acquired with proceeds of Rothstein's $1.2 billion Ponzi scheme.
However, now over three years later, not one of Rothstein's victims has seen a penny from the court-appointed bankruptcy trustee, who has been locked in a court battle with federal authorities over the right to dispose of those assets and distribute proceeds to victims. Instead, in what legal experts describe as a murky area of legal jurisprudence long overdue for a showdown, the seized assets have remained in legal limbo as the two unlikely adversaries litigated their claims to possession in a clash between criminal forfeiture law and bankruptcy jurisprudence.
This week, the Eleventh Circuit Court of Appeals heard argument this week over entitlement to the assets, with at least one judge expressing unbridled skepticism at the government's position. Circuit Judge Gerald Tjoflat, a long-tenured Eleventh Circuit justice and a respected expert on bankruptcy law, took an active role during the arguments, repeatedly questioning the government's attorneys and insinuating that the government's actions were overreaching and unwarranted. While a ruling is forthcoming, many expect the issue to make its way to the doorsteps of the U.S. Supreme Court.
The source of contention between the trustee and the government boils down to one simple issue: who can more efficiently distribute proceeds to victims of Rothstein's fraud. United States District Judge James I. Cohn, a sitting judge in the Southern District of Florida where Rothstein's fraud was based, largely sided with prosecutors in forfeiture proceedings, questioning why assets should be returned to the bankruptcy estate where they would be returned to the pool of money available to all creditors - not just Rothstein's victims. Judge Cohn vocalized these concerns, noting that
It would be patently inequitable to return that money to RRA's estate when it can be returned directly to the clients and qualified investors.
And he may have a point. While Rothstein ran a classic Ponzi scheme, he did it in his position as chairman of one of South Florida's largest law firms, Rothstein Rosenfelt Adler ("RRA"). When the scheme collapsed, RRA soon was forced into bankruptcy and over 70 RRA lawyers lost their jobs. The resulting bankruptcy proceeding included not only victims of Rothstein's scheme, but also other creditors expected when a large law firm went into bankruptcy, including landlords, service providers, and former clients. Thus, because investors would not be the only ones sharing in the pot of recovered assets, the additional number of claims means that subsequent distributions would be accordingly diluted.
But Herbert Stettin, the court-appointed bankruptcy trustee, has maintained that the assets rightfully belong to the bankruptcy estate, as they were acquired with tainted funds and thus constituted proceeds of Rothstein's fraud. Already, Stettin's recovery efforts are likely to fall well short of the over $1 billion of estimated losses, due in part to Rothstein's dangerous penchant for burning through large amounts of money in activities with little or no prospect of recovery such as call girls, prostitutes, and nights on the town. The inability to bring those disputed assets into the bankruptcy estate means that Stettin will have to rely largely on litigation, including clawbacks from scheme profiteers, to to bring assets into the bankruptcy estate.
Increase in Forfeiture Actions Yields Positive Results
While the relationship between authorities and court-appointed bankruptcy trustees or receivers has not always been so contentious, the government has recently embarked on an aggressive push in bringing criminal forfeiture actions that has resulted in a spike in recoveries by the Department of Justice's Asset Forfeiture Program. While recoveries remained fairly constant from 2000 - 2005, forfeitures suddenly doubled in 2006 and have continued at an increasing pace to a record $1.684 billion in 2011, as shown by the table below:
- 2000: $507,033,378
- 2001: $439,930,324
- 2002: $453,132,562
- 2003: $466,968,207
- 2004: $537,113,193
- 2005: $578,803,657
- 2006: $1,143,341,308
- 2007: $1,583,388,625
- 2008: $1,327,604,903
- 2009: $1,583,388,625
- 2010: $1,600,370,705
- 2011: $1,684,810,126
The reports are available here. While not solely attributable to the recent proliferation in Ponzi schemes, the correlation is unmistakable.
However, while bankruptcy trustees and court-appointed receivers are obligated to distribute all net asset recoveries, the government is under no such obligation with forfeiture proceeds. Instead, the government is given sole discretion in determining the proper use of the funds, and these decisions are not subject to review or judicial oversight. According to financial statements provided by the DOJ, on average less than one-third of yearly recoveries is used to compensate fraud victims.
Victims Still Waiting
The dispute could arguably be blamed for the reason that, despite Rothstein's scheme unraveling more than three years ago, victims have yet to see a single penny from Stettin's recovery efforts. Indeed, the recovery and disposal of assets acquired with scheme proceeds occurs soon after a receiver or trustee's appointment, and the resulting proceeds are often used to fund initial distributions. While clawback litigation is also a significant source of asset recoveries, fruits of those efforts are often not realized until years later after the litigation has worked its way through the system.