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Recent SEC Releases

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:


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



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


Zeek Receiver Wins Approval To Pursue Class Action Clawbacks 

A North Carolina federal judge has given the go-ahead for a court-appointed receiver to treat nearly 10,000 "net winners" of the $700 million ZeekRewards Ponzi scheme as defendants in a class-action lawsuit - a mechanism that the overseeing judge deemed as "the only means to reasonably and efficiently resolve the Receiver’s claims against 9,400 net winners.”  Kenneth D. Bell, the Receiver for Rex Venture Group, LLC d/b/a ("ZeekRewards"), is seeking the return of fictitious "profits" from approximately 9,400 participants in the ZeekRewards scheme that were fortunate enough to realize $1,000 or more in returns from their involvement.  Allowing the pursuit of these net winners, as they are known in receivership parlance, as a class will not only greatly reduce the complications and redundancy in bringing the same claims against thousands of individuals, but in doing so will also preserve assets for future distribution to those victims who were not as fortunate.  

ZeekRewards was an online penny auction website that attracted users at an exponential pace due to a lucrative investment program that promised annual returns exceeding 200% and provided recruitment-based incentives to participants..  The program, masterminded by Paul Burks, attracted over one million participants before the Securities and Exchange Commission filed an emergency enforcement action in August 2012 alleging the venture was a massive Ponzi and pyramid scheme.  Following Bell's appointment, his subsequent investigation revealed that over 700,000 participants suffered collective losses exceeding $700 million.

Bell's investigation also showed that tens of thousands of participants had not only recouped their initial investment but also varying amounts of "false profits" that, by virtue of Zeek's operation as a Ponzi scheme, were simply the redistribution of investments by other victims.  Bell has instituted separate actions against the largest net winners not only in the U.S., but other countries such as Canada, New Zealand, and Australia.  

While some of the top net winners received more than $1 million from ZeekRewards, the vast majority of profiteers received a much smaller amount of false profits.  Bell employed a strategy whereby he sued the top ten U.S. net winners, who each received false profits of over $900,000, and sought to designate those net winners as class representatives for a much larger class of approximately 9,400 profiteers who had earned more than $1,000 from the scheme.  Bell argued that those class representatives would likely retain experienced counsel and mount a vigorous defense due to the large sums sought, and that these representatives would "fairly and adequately protect the interests of the class."  Pursuant to Rule 23(a) of the Federal Rules of Civil Procedure, Bell argued that the requisite requirements of numerosity, commonality, typicality, and fair and adequate representation had been satisfied.  Not surprisingly, Bell's request was opposed by the proposed class representatives, who claimed that certification was improper on the basis that it would deprive those individuals of certain due process rights.

The Court's decision first analyzed the four factors set forth in Rule 23(a).  While Defendants did not contest the numerosity requirement, it analyzed objections to the commonality and typicality factors.  First, the Court rejected Defendants' commonality arguments, finding that any potential dissimilarities did not impair the ability to reach a common resolution to the core issues of law and fact.  Next, the Court found that the proposed class representatives satisfied the typicality requirement on the basis that each participated in the same event and course of conduct that gave rise to the Defendant class.  Finally, the Court found that the proposed representatives fairly and adequately represented the interests of the 9,400 class members, finding that their issues were aligned and that the representatives were not likely to abandon their or return the substantial sums sought by the Receiver without engagement of competent counsel and mounting a vigorous defense.

The certification of the class will not only result in an efficient mechanism to pursue thousands of clawback claims, but also avoided the nightmare scenario of potentially having inconsistent results if the Receiver were forced to pursue each of the clawback defendants individually.  Additionally, doing so would have resulted in exponential costs to the Receiver that would serve only as a dollar-for-dollar reduction in assets that could potentially be later returned to victims.  Finally, allowing the receiver to pursue clawback claims in a class action also increases the total potential recoveries by allowing the receiver to target net winners with a lower threshold of clawback claims that might not have been a realistic target in the context of a separate action.  

A copy of the Court's order is below:

Order Cert Class


Jury: Former Ambassador Must Return $700,000 To Stanford Receiver

A federal jury found that a former U.S. Ambassador to Ecuador must return more than $700,000 in compensation he received as an employee of Allen Stanford's massive $7 billion Ponzi scheme.  The case brought by a court-appointed receiver against Peter Romero, of St. Michaels, Maryland, was seen as a test case for more than a dozen similar trials scheduled for 2015 and 2016 against those who received transfers from Stanford's scheme either as an employee or investor.  Stanford is currently serving a 110-year prison sentence at a high-security Florida federal prison.

Romero worked at the State Department during the Clinton administration who, after leaving the State Department, subsequently signed on to work for Stanford as a consultant in the early 2000's.  According to the receiver, Romero's primary role was to recruit new investors to the scheme - trading on "his prior government service to become an ambassador for Allen Stanford." Romero traveled all over the world, interacting with media outlets as well as current and potential clients.  In addition to working with Stanford's marketing operations, Romero's activities included radio interviews and appearances to give speeches.  

The Court-appointed receiver, Ralph Janvey. originally sued Romero in February 2011 for the return of nearly $600,000 in compensation, and subsequently amended the suit to increase the amount sought to nearly $1 million.  Janvey alleged that Romero allowed Stanford to attract potential investors and curry favor with politicians by leveraging his reputation and government contacts.  Janvey has also recently alleged that Romero willfully destroyed evidence of his relationship with Stanford by deleting the email account he used to communicate with Stanford in the days following the revelation of the scheme in 2009.  Romero's lawyers denied Janvey's allegations, instead attempting to satisfy their affirmative defenses under TUFTA by alleging that "Romero was a good-faith transferee whose services as a member of the Stanford International Advisory Board for market-rate compensation constituted reasonably equivalent value."

Following the close of testimony, the Receiver, Ralph Janvey, submitted a Motion for Judgment as Matter of Law ("Motion for Judgment") seeking a judgment of more than $1 million: $725,000 in compensation from a Stanford entity, nearly $377,000 in investment redemptions, and almost $34,000 in expense reimbursements.  While the jury decided that Romero was required to return his compensation, they did rule in his favor in deciding that he was not liable for the return of the approximately $377,000 in redeemed investments before the collapse of Stanford's scheme in 2009.

A copy of the Receiver's Motion for Judgment is below:


Romero Motion for Judgment


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