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Recent SEC Releases
Friday
Feb272015

TD Bank Pays $67 Million Judgment To Rothstein Ponzi Victims

“We are extremely pleased that TD Bank opted – at long last – to comply with the district court’s order.  The judgment has been satisfied in full."

- Nina Stillman Mandel, co-counsel for Coquina Investments

With just hours to spare before the expiration of a deadline imposed by a Florida federal judge, TD Bank has paid the $67 million judgment it owed after a federal jury found it liable for its role in Scott Rothstein's $1.2 billion Ponzi scheme.  Over three years after the jury's verdict, and roughly 5.5 years after Rothstein boarded a plane to Morocco with his scheme on the verge of collapse, a group of Texas investors known as Coquina Investments ("Coquina") finally collected on what was one of the only successful attempts to hold a financial institution liable for its role in a Ponzi scheme.  The payment comes after years of legal wrangling by TD Bank, and featured attempts to both overturn the verdict and to later decrease the underlying owing sum.  Indeed, despite payment of the judgment, the bank is currently contesting several recent court rulings in Coquina's favor.

Rothstein's Scheme

Rothstein touted lucrative returns to investors through the purchases of highly confidential legal settlements purportedly stemming from claims of sexual harassment, whistle-blower, and qui tam actions against large corporations.   According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to payment of that settlement at a discount.  With the investor sworn to secrecy and enamored by the prospect of an lucrative return, there was a built-in incentive for all parties to remain tight-lipped. Potential investors were assured that their funds would remain safe in a firm trust account held at TD Bank, with some provided "lock letters" authored by bank officials purportedly assuring them that their funds were impervious to ill will or influence.  

As would later emerge in spectacular fashion, Rothstein's alleged secretive settlements were bogus and nothing more than what would later be revealed as the largest Ponzi scheme in Florida history.  Indeed, as he would later confide in authorities as part of one of the most memorable (and effective) post-conviction cooperation campaigns, Rothstein pointed the finger at numerous individuals who he claimed shared blame for the scheme, including Frank Spinosa - the then-regional Vice President of the TD Bank branch in Ft. Lauderdale.  As alleged by Rothstein (and later by both civil and criminal authorities), Spinosa played an integral role in the scheme through a series of actions that included making false representations to investors and authoring "lock letters" that were facially false.

The Suit, Verdict, and Appeal

Coquina, represented by Mandel & Mandel LLP, sued TD Bank in May 2010, alleging the bank was integral toRothstein's fraud and that it shared liability for the losses it caused.  The bank tried several tactics, including claiming not only that it was the bank of Rothstein's firm, Rothstein Rosenfeldt Adler, and thatRothstein defrauded investors, but also that it should have been "obvious" to Coquina that they were purchasing fraudulent investments.  Not buying either argument, a federal jury took several hours to hand down a $67 million verdict finding that the bank "provided substantial assistance to advance the commission of the fraud against Coquina."  It was also later revealed that TD Bank failed to turn over documents in the discovery process, including documentation supporting Coquina's arguments that the bank ignored Rothstein's status as a high-risk client, that might have even supported a larger punitive damage award.  The bank and its counsel were later sanctioned for these mishaps. 

Even following the verdict, TD Bank mounted a vigorous campaign to eradicate the verdict that included the assertion of multiple grounds for reversal.  The Eleventh Circuit Court of Appeals considered and rejected each ground.  The bank then attempted to reduce the size of the amount it owed, contending thatCoquina's status as a creditor in the bankruptcy estate of Rothstein's firm and the payment it had already received as part of the estate's historic plan to return 100% of each investor's losses might serve as the basis to reduce the $67 million judgment.  This argument was rejected by both the trial and appellate court, and on February 11, 2015, U.S. District Judge Marcia G. Cooke gave the bank until February 26th to satisfy the judgment or face the prospect of seeing Coquina collect on the $73.7 supersedeas bond posted by its surety.  

While the bank appealed Judge Cooke's pertinent order, it appears that they chose to heed that order in satisfying the judgment on the day of the deadline.  Indeed, a declaration filed today by Coquina's counsel confirmed that TD Bank had satisfied the judgment and also provided evidence of Coquina's payment of $9.1 million to the RRA bankruptcy estate representing the repayment of an initial distribution to creditors.

Conclusion

Like many facets of Rothstein's larger-than-life persona, Coquina's outcome - and that of the RRA creditors who realized a 100% return on their investment - can only be met with a healthy share of bewilderment and admiration.  The outcome is believed to represent the largest (and one of the only, if not the only) verdict against a financial institution for its role in a Ponzi scheme, and comes as similar suits around the nation fall flat based on a heightened standard that courts rarely find satisfied.  Yet, the Rothstein verdict is not an anomaly, but rather the result of the existence of an (alleged) bad actor whose conduct and voracious appetite to appease a large client ultimately landed a national banking institution in the crosshairs.  Through this verdict and other settlements, including with the RRA bankruptcy trustee, TD Bank's financial exposure alone to Rothstein amounted to over half of one billion dollars.

Previous Ponzitracker coverage of the Rothstein scheme is here.

Wednesday
Feb252015

International Clawbacks Start In ZeekRewards Receivership 

Over two years after the Securities and Exchange Commission allleged that ZeekRewards was operating a massive $600 million Ponzi and pyramid scheme, the court-appointed receiver is now seeking to "claw back" millions of dollars in false profits from citizens of foreign countries that include the British Virgin Islands, Australia, New Zealand, and Norway.  Kenneth D. Bell, the receiver, has filed several lawsuits recently that target the top "net winners" from each of those countries who allegedly each received more than $50,000 in illicit profits from the scheme - profits that, by virtue of the operation of a Ponzi scheme, are not legitimate returns but rather are simply the redistribution of investor funds.  

Clawback Litigation

A "clawback" suit, as it is known in receivership parlance, seeks the return of funds that were transferred to a third party often disguised as the payment of profits or returns.  Under state-specific fraudulent transfer laws patterned after the Uniform Fraudulent Transfer Act, a creditor can seek to avoid a transfer made by a debtor to a third-party under several theories, including that the transfer was made with the intent to hinder, delay, or defraud creditors, or that the debtor did not receive reasonably equivalent value for the transfer.  While a showing of actual fraud is not required and can be demonstrated through other factors, transfers made from a Ponzi scheme are presumptively made with the intent to defraud due to established law that a Ponzi scheme is insolvent from inception as a matter of law.  

 Bell hinted last year that in a quarterly report that he soon intended to initiate clawback suits against foreign net winners who had received at least $1,000 in illicit profits from their investment in ZeekRewards. Bell has pursued domestic net winners that received $1,000 or more, and recently received court approval to pursue those individuals through a class action framework that will provide for a more efficient mechanism to pursue those individuals against whom it might have been cost-prohibitive to pursue individual litigation.  However, the suits brought against the foreign net winners target only those who profited by $50,000 or more from the scheme, and it remains unknown whether Bell will pursue those who realized lower profits.  

Foreign Clawbacks

The recently-filed clawback suits each target citizens of a separate country who received at least $50,000 in profits from their involvement in ZeekRewards.  On December 29, 2014, Bell filed suit against over two dozen Australian investors who allegedly received more than $3 million in false profits.  He then filed suit on January 30, 2015 against five British Virgin Islands investors who allegedly collectively received nearly $3 million in false profits - including one investor who alone was accused of receiving over $2 million in proceeds.  On February 11, 2015, Bell sued three New Zealand affiliates who allegedly received collective profits of nearly $750,000.  Finally, Bell filed a complaint on February 19, 2015, against nearly two dozen Norwegian investors that allegedly collectively received over $1 million in false profits.

Rather than initiate litigation in each of the countries where the net winners reside, Bell is proceeding with the suits in the Western District of North Carolina - where the receivership is being conducted out of and where Zeek was headquartered before its collapse - based on those defendants' contacts with the district through their involvement in (and receipt of funds from) the ZeekRewards program.  However, even if the Receiver is able to obtain judgments against those foreign defendants, additional litigation may be required in those defendants' home countries to enforce and collect on those judgments.  

To date, Zeek victims have received 40% of their approved losses.

The complaints in each of the lawsuits are below.  A special thanks to ASDUpdates for providing the filings.

 

Doc 1

 

 

 

1 - Complaint (1) by jmaglich1

 

 

 

Complaint by jmaglich1

 

 

 

1 - Complaint by jmaglich1

Monday
Feb232015

Deadline Looms For Bank To Pay $67 Million Judgment To Rothstein Victims

Judge, this is like a football game. And the game is over, the crowd has left, and the cleaning crew is working in the stands. In spite of TD's numerous unsportsmanlike conduct penalties, the scoreboard shows that we won 67 to nothing. And despite everything, TD is here today throwing a Hail Mary pass, not acknowledging that there is no time left on the clock. TD Bank's illusory damages game is over. That's what final and unreviewable means.

Having defrauded, lied, and cheated in this very courtroom, we respectfully submit that TD has been afforded enough due process by this Court. It has had a mountain of it. With respect, it is unfair to make Coquina wait any longer.  Guided, as I know it is, always by fairness and decency, I ask the Court to rule that TD's day of reckoning is finally at hand.
- Counsel for Coquina Investments

Over three years after a federal jury handed down a $67 million verdict against TD Bank for its role in Scott Rothstein's $1.2 billion Ponzi scheme, and following numerous efforts by the bank to reduce or otherwise overturn the verdict, a Florida federal judge has denied the bank's latest motion to reduce the judgment and ordered that the bank pay the judgment by February 26.  Coquina Investments, which sued TD Bank for millions of dollars it lost after Rothstein's scheme collapsed in 2009, obtained a ruling from U.S. District Judge Martha Cooke on February 11 denying TD Bank's latest Motion for Partial Relief from Judgment.  If TD Bank fails to pay the judgment on or before February 26, Coquina will be entitled to collect from the $73.7 million supersedeas bond (110% of the $67 million verdict) posted by TD Bank when it originally appealed the $67 million verdict.  It would be rather rare if TD Bank refuses to pay and forces Coquina to collect from Travelers Casualty and Surety Company of America - the surety posting the bond on TD Bank's behalf. 

The Litigation

TD Bank had extensive ties with Rothstein, who promised investors the possibility of significant short-term returns through purported confidential settlements with whistleblowers and sexual harassment victims. To convince investors of the legitimacy of his operation, Rothstein claimed that the amount of the alleged settlements had already been deposited into TD Bank trust accounts administered by Rothstein's law firm and which were subject to strict transfer restrictions.  Investors were provided with "lock letters" by TD Bank vice president Frank Spinosa attesting to the fact that the transfer restrictions were, in fact, in place and that the claimed balance was correct.  However, there were no such transfer restrictions, and Rothstein was able to transfer funds freely.  Additionally, rather than containing the significant balance represented in the "lock letter," many accounts contained nominal $100 balances.  

Coquina invested nearly $38 million with Rothstein based on these representations.  The partnership made several withdrawals during the course of its relationship with Rothstein, and ultimately lost nearly $7 million when the scheme collapsed.  However, despite its losses, Coquina was informed by the court-appointed trustee that it faced claims for the "clawback" of certain withdrawals made before the scheme's collapse.  Coquina ultimately settled with the trustee, paying $12.5 million and agreeing that the trustee could recoup up to $18.6 million if Coquina prevailed in its suit against TD Bank.

At trial, a federal jury found in favor of Coquina on its aiding and abetting and fraudulent misrepresentation claims, and awarded $32 million in compensatory damages and $35 million in punitive damages for a total award of $67 million.  Following the verdict, the trial judge also imposed sanctions against TD Bank and its counsel for the failure to produce relevant evidence that reflected unfavorably on the bank.  

On appeal, TD Bank raised several issues, including the propriety of drawing an adverse inference against Spinosa's invocation of his Fifth Amendment rights during testimony, whether the settlement agreement between Coquina and the trustee was properly admitted into evidence, and whether Coquina's damages claim was proper.  The Eleventh Circuit addressed each contention, and ultimately found each unpersuasive.  The Court also found that the trial court's imposition of sanctions, including accepting as true that TD Bank has actual knowledge of the fraud and that its account-monitoring systems were unreasonable, were consistent with the facts in the record for the significant misconduct alleged by TD Bank.  

TD Bank's Latest Argument

After the Eleventh Circuit Court of Appeals "affirm[ed] [the underlying judgment] in all respects," TD Bank turned its efforts to reducing Coquina's $67 million judgment on the basis that certain sums might constitute a "double recovery" when considering Coquina's status as a creditor in the Rothstein bankruptcy proceeding.  TD Bank's argument revolved around the intricacies of Coquina's settlement with the bankruptcy trustee overseeing the Rothstein estate, which was reached just before the trial on Coquina's claims against TD Bank.  

Under the terms of that settlement, Coquina paid the bankruptcy estate $12.5 million up-front, regardless of the outcome of the TD Bank trial, and also agreed to pay the estate a percentage of any subsequent recovery from TD Bank until that sum reached the total amount Coquina received from Rothstein's scheme (roughly $31 million).  In return, Coquina was granted a release from any further claims it might face from the bankruptcy estate, as well as given an allowed general unsecured claim for payments it made to the estate.

While TD Bank appealed the underlying verdict, Coquina received a $9.1 million payment from the bankruptcy estate as part of the court-approved distribution plan that represented a partial payment on the $12.5 million previously paid by Coquina.  TD Bank then sought to reduce the $67 million judgment on the basis that Coquina stood to receive a "double recovery" and that any settlement damages were "speculative" and "nonexistent."  Coquina revealed that it was required to return the $9.1 million upon any partial or complete satisfaction of its judgment, and TD Bank's motion was denied.

TD Bank then moved for a stay of enforcement of the judgment while Coquina sought to collect on a bond previously posted by TD Bank to satisfy its judgment.  At a hearing before the trial court on February 11, 2015, TD Bank again argued that Coquina's receipt of the $9.1 million from the bankruptcy trustee would result in a "windfall" and warranted a dollar-for-dollar reduction in the judgment.  Counsel for Coquina, David Mandel, summarized the argument as follows:

Judge, they are treating this like it's a newly filed complaint. It's not. We aren't supposed to wait around and see what happens later and see what develops. We had a hard-fought trial. These issues were raised and they lost. It is now time for them to pay the piper.

The jury had the settlement agreement with the trustee in evidence before it, they considered all of the things that TD is arguing now, and they were not persuaded. This Court heard and rejected those same arguments from TD Bank in their post-trial motions. And then what happened? They appealed to the Eleventh Circuit, which heard the defendant's arguments again attacking the damages, and the Eleventh Circuit squarely rejected them. They petitioned for rehearing en banc and lost again, not a single judge even asking for a poll. They keep on making these same arguments again and again and again. It's like they think the Court is a Turkish bazaar where they have to keep asking for a discount. It's not, Judge. It's not.  This has the feel of deja vu all over again.

Following argument, District Judge Marcia Cooke again rejected TD Bank's arguments, but did include an order in her ruling (as requested by Coquina) requiring Coquina to return the $9.1 million to the bankruptcy estate within three days of payment of the judgment (or collecting on the bond, in the case TD Bank refused to pay).  Predictably, TD Bank sought to stay the enforcement of the judgment, but Judge Cooke denied that request as well:

I am going to allow Coquina to collect on the bond. You want to post another bond you can, but I'm going to allow them to collect on the first one. This has been going on for two years.

With the 26th fast approaching, it remains unseen whether TD Bank will pay the judgment or force Coquina to collect on the bond posted on its behalf.  Regardless, it appears that, over five years after the collapse of Rothstein's scheme, one of the only jury verdicts granted against a financial institution and in favor of a defrauded Ponzi scheme victim will come to fruition.  

Coquina's response to TD Bank's "time-sensitive" motion for stay is below:

Saturday
Feb212015

SEC Halts "Triple Algorithm" Ponzi Scheme

The Securities and Exchange Commission has filed an emergency enforcement action against a Colorado-based Ponzi scheme that offered 700% returns through a "triple algorithm" and "3-D matrix."  Kristine L. Johnson, of Aurora, Colorado, and Troy Barnes, of Riverview, Michigan, were charged with multiple violations of federal securities laws in connection with the operation of Work With Troy Barnes Inc. ("WWTB"), which currently does business as "The Achieve Community" ("TAB").  Indeed, despite distributing a promotional video claiming that WWTB was "not a pyramid scheme," the Commission alleged that the venture was a "pure Ponzi and pyramid scheme."  The Commission is seeking disgorgement of ill-gotten gains, injunctive relief, civil monetary penalties, and pre-judgment interest.

WWTB was formed in March 2014, and was subsequently rebranded as TAC.  Beginning in April 2014, TAC solicited investors to purchase "positions" in TAC.  These "positions," which cost $50 each, promised a pay-out of $400 per position in a term of three-to-six months - a return of 700% and an annualized return exceeding 1000%.  In a short video on TAC's website, Johnson touted TAC as a "lifetime income plan," and explained:

How are we a lifetime income plan? It’s simple. Every $50 position you purchase, you make $400. With two positions, you make $800. With five positions, you make $2,000. Want to go bigger? With twenty positions, you make $8,000. With one hundred positions, you make $40,000. This is limitless.

Barnes made similar claims, narrating a different TAC video claiming that TAC “will teach you how to take $50 and turn it into thousands of dollars, and that’s a fact.”  Investors that questioned TAC's ability to pay such exorbitant returns were assured that TAC utilized a "triple algorithm" and "matrix" created by Johnson and Barnes.  Johnson attempted to explain the "3-D matrix" as follows:

I thought, what can I do, what can I make, what can I design, that has only what works and none of what doesn’t, and one day, honestly this is what happened, I just saw it. I just saw it in my head. This matrix is 3D, which is why we can’t put it on paper. It’s a triple algorithm. And I can’t for the life of me tell you why I could figure that out in my head. But I could.

Investors were encouraged to re-invest their returns, with Barnes assuring investors that such a strategy would make it "very easy to make six figures."  In total, TAC took in at least $3.8 million from investors.

However, despite its claims that it was "not a pyramid scheme," the Commission alleged that TAC was, in fact, a pure Ponzi and pyramid scheme.  For example, TAC's sole source of revenue is alleged to have originated from funds contributed from investors.  Nor were any profits derived from legitimate business activities; rather, TAC used funds contributed from new investors to make principal and interest payments to existing investors.  In addition to using investor funds for "Ponzi" payments, the Commission also accused Johnson and Barnes of misappropriating more than $200,000 for their own personal use - including $35,000 for a new car, making personal credit card payments, and more than $40,000 in Paypal transfers to Barnes.  

A copy of the Commission's complaint is below:

 

TAC Complaint

 

Saturday
Feb212015

Court: Madoff Victims Can't Get Interest Or Inflation On Losses 

A New York federal appeals court sided with the court-appointed bankruptcy trustee for Bernard Madoff's massive Ponzi scheme in ruling that Madoff's victims were not entitled to have their losses upwardly adjusted for interest or inflation.  The ruling by the Second Circuit Court of Appeals means that, regardless of the length of victims' investments with Madoff, each will be entitled to their pro rata share of funds recovered by the trustee, Irving Picard.  The decision, if not appealed, will ultimately clear the way for the distribution of more than $1 billion currently being held in reserve pending determination of the issue.  Victims have already recovered over 50% of their losses.

In the aftermath of a Ponzi scheme, a claims process is often instituted to return recovered assets to victims on a pro rata basis based on approved losses.  While a victim's claim is often decreased based on the amount of payments or distributions they received from the scheme during its existence, some of Madoff's victims took the position that they were entitled to an upward adjustment accounting for inflation during the period of their investment and/or interest to reflect the time-value of money.  Under this rationale, those victims who had invested with Madoff for a longer period of time would be entitled to an increase in their claim - logically, at the expense of other victims who had not invested with Madoff for such a duration.  As the Second Circuit characterized the victims' position, 

the claims of Madoff’s earlier investors are unfairly undervalued when compared to the claims of Madoff’s later investors.

Under the statutory framework of the Securities Investor Protection Act ("SIPA"), which governed the liquidation of Madoff's brokerage, the Second Circuit concluded that 

an inflation adjustment to net equity is not permissible under SIPA.  An inflation adjustment goes beyond the scope of SIPA’s intended protections and is inconsistent with SIPA’s statutory framework.

The Second Circuit gave weight to the absence of an inflation-based adjustment from SIPA's provisions, noting that such a provision would be "nonsensical" given SIPA's intended purpose to remedy broker-dealer insolvencies rather than the outright fraud committed by Madoff.  Rather, SIPA aims to restore investors to their position had a liquidation not occurred.

Picard has now survived an impressive assortment of challenges to his use of the "net equity" method as the proper determinant of victim loss calculations.  In addition to the now-unsuccessful attempts to tack on interest and inflation, efforts previously failed to force Picard to accept the amount showing on the last statement mailed by Madoff to victims - the "Last Statement Method" - an argument the Second Circuit previous rejected on the basis it 

“would have the absurd effect of treating fictitious and arbitrarily assigned paper profits as real and would give legal effect to Madoff’s machinations.”

In re Bernard L. Madoff Inv. Sec. LLC, 654 F.3d 229, 231– 33 (2d Cir. 2011).  Like the interest and inflation arguments, the "Last Statement Method" would also have favored long-term Madoff investors who watched as their purported account balances consistently increased.  Importantly, each of the methods would have ultimately resulted in a lower payout to investors due to the inverse relationship between the total amount of allowed claims and funds available for victims.  Fortunately, the success of Picard and his professionals in recovering assets has resulted in a pot of over $10 billion earmarked for victims. 

Notably, the Securities and Exchange Commission supported the victims' position - and opposed the trustee - that SIPA permitted inflation-based adjustments.  The Second Circuit concluded that this position was not entitled to any deference typically afforded to administrative interpretations, and remarked that the Commission's interpretation was "novel, inconsistent with its positions in other cases, and ultimately unpersuasive."  Indeed, the Court observed that that, while favoring an inflation-based adjustment in this case, the Commission had recently opposed such an adjustment in a "different, long-lasting Ponzi scheme."  Given that both scenarios envisioned an outcome where recovered assets would ultimately be insufficient to fully satisfy investor claims, the Second Circuit rejected any basis to further exacerbate this shortfall.

The Second Circuit's Order is below:

Madoff Opinion by jmaglich1