This is likely the first major Ponzi scheme case where payouts may fully compensate creditors holding general unsecured claims for their losses.
- Herbert Stettin, court-appointed bankruptcy trustee
As 2009 drew to a close, hundreds, if not thousands, of lives had been upended in Ft. Lauderdale, where Scott Rothstein's $1.2 billion Ponzi scheme - the largest in Florida history - imploded in grand fashion. In addition to the numerous victims that lost some, if not all, of their life savings, the scheme's disclosure resulted in the overnight shuttering of Rothstein's once thriving 70-lawyer law firm, Rothstein Rosenfelt Adler. When news broke, Rothstein was across the globe, having fled as his scheme unraveled with $15 million in cash and luxury watches as an escape plan. Many investors braced themselves for the worst, expecting that Rothstein had squandered away the entirety of funds entrusted to him.
Fortunately, they could not have been further from the truth. Three years later, in what could accurately be described as the 'holy grail' in the newly-emergent cottage industry of court-appointed receiverships and bankruptcies tasked with gathering assets for victims of Ponzi schemes, they can likely expect to receive 100% of their approved losses. Herbert Stettin, appointed in November 2009 as the bankruptcy trustee to recover funds for Rothstein's victims, announced in his final liquidation plan that he expected that "payouts may fully compensate creditors holding general unsecured claims for their losses."
A 100% recovery, or even anything close, would represent a remarkable and unprecedented feat in Ponzi scheme litigation. To put the feat in context, the Internal Revenue Service, in promulgating guidance for those victimized by Ponzi schemes, implicitly estimates that victims recover less than 5% of their losses on average. Indeed, recoveries thus far in the 40% range by the Bernard Madoff bankruptcy trustee and the Arthur Nadel receiver have been hailed as extraordinary. A closer look at the liquidation plan reveals that Stettin's blockbuster recovery is not only largely predicated on a familiar third-party's contribution, but could actually be much larger.
Proposed Settlement With Alleged Co-Conspirator TD Bank
Buried deep in the 300-page disclosure statement and 200-page liquidation plan detailing Stettin's efforts is a proposed $72.45 million settlement between Stettin and TD Bank. TD Bank, as those connected with Rothstein's scheme are keenly aware, is alleged to have played a key role in the scheme by serving as the scheme's banker, and at least one of its employees allegedly provided substantial assistance to Rothstein. This included falsification of bank documents, impersonation of investors and bank officials, and the general aura of the association with a banking powerhouse such as TD Bank.
While some may initially balk at what seems to be a pittance compared to hundreds of millions of dollars in losses, a closer look shows that Stettin's successful recovery is owed in large part not only to this settlement, but also to the large sums already paid out in ancillary litigation. Indeed, TD Bank has already been on the losing end of several investor lawsuits to the tune of $237 million. As part of the liquidation plan, Stettin proposes that those parties that have already recovered from TD Bank be barred from sharing in the distribution process until total claims paid out reach 95% of losses. This has the key effect of diminishing the applicable claims, and essentially operates as if Stettin had already satisfied those claims using available funds.
In light of its continuing exposure, TD Bank's settlement with Stettin is contingent on the entry of what is known as a 'bar order', which would permanently enjoin any current, contemplated, or future lawsuits against the bank based on Rothstein's scheme. While some involved in ongoing lawsuits have voiced their opposition to a bar order, a compelling argument in favor of the bar order is that the $72.45 million would be distributed to all of the affected investors - rather than those fortunate enough to be parties to the current investor lawsuits. Such an argument especially rings true in Ponzi scheme litigation, and TD Bank has explicitly indicated that it will not consummate the settlement if a bar order is not included.
With Money On Hand And Future Inflows, Total Recovery Could Be Even Higher...
Presently, Stettin indicated that he had received total claims filed in the amount of $461,078,446.36. Of that amount, Stettin has filed a variety of objections designed to reduce or eliminate a portion of those claims, and eventually expects those efforts to decrease the total claims for a majority of the creditor classes to approximately $141 million. Stettin has approximately $79.2 million in cash on hand, which, combined with the $72.45 million TD Bank settlement, would allow 100% payment of the estimated claim total of $141 million. Additionally, Stettin is pursuing numerous clawback lawsuits against investors fortunate enough to profit from their investment, with future recoveries belonging to the bankruptcy estate. Finally, as detailed in a previous Ponzitracker article, Stettin is embroiled in a dispute with the U.S. government over entitlement to an estimated $50 million in forfeited funds.
...With One Unlikely Beneficiary.
Ironically, the party that stands to benefit the most on the success of Stettin's ongoing recovery efforts is TD Bank. In the Liquidation Plan, TD Bank stands to collect on a $132.5 million claim in the event that the allowed classes with higher payment priorities are paid in full. This number reflects the current total of settlements and jury verdicts rendered thus far against the bank, of which a majority constituted various investors' claimed Rothstein losses. Specifically, the bank settled for $170 million with one group of investors, while a federal grand jury handed down a $67 million award last year. However, of the resulting $237 million total, $35 million of the jury award constituted punitive damages - and not investor losses. Thus, deducting that $35 million portion and the $72.45 million settlement with Stettin yields a $132.5 million claim.
Under Rule 326(a) of the Bankruptcy Code, Stettin is set to receive 3% of all payouts to investors. With the above outcome, one would be hard-pressed to argue.
The proposed liquidation plan will now be submitted to the Bankruptcy Court for examination and approval.
A copy of the Disclosure Statement is here.
A copy of the Final Liquidation Plan is here.
Previous Ponzitracker coverage of the Rothstein scheme is here.
Previous Rothstein coverage by Paul Brinkmann of the South Florida Business Journal is here.