Rothstein Victims' Lawsuit Against TD Bank Scheduled to Begin Monday

The trial between a group of Texas investors defrauded in Scott Rothstein's $1.4 billion Ponzi scheme and the bank they claim helped Rothstein facilitate his scheme, TD Bank, is scheduled to begin October 24th.  The victim, Texas-based investment partnership Coquina Investments, filed the suit in May 2010 alleging that TD Bank played a "crucial and pivotal role" in Rothstein's scheme.  The case will proceed without Coquina's claims based on the Racketeer Influenced and Corrupt Organizations Act ("RICO"), which were recently dismissed by United States District Judge Martha Cooke, the presiding judge on the case.  Judge Cooke stated that Coquina failed to show that TD Bank benefited from the alleged fraud and had failed to show a pattern of racketeering activity. RICO claims are alluring to plaintiffs in that they allow recovery of treble damages.

Coquina's complaint centers on the role of several TD Bank employees, including Frank Spinosa, a former regional vice president who allegedly provided substantial assistance to Rothstein that included making false verbal statements to investors, providing false and misleading documents, and actively concealing the fraudulent activity. In his role as vice president, Spinosa is alleged to have provided documents to investors purporting to restrict funds in a TD Bank account for the sole control of Coquina, when in fact there was no restriction enacted and fictitious account balances were generated.  Through the actions of Spinosa and other employees, Coquina alleges that investors were provided with a false sense of security and assurances that Rothstein was operating a legitimate operation peddling structured settlements:

Defendant ROTHSTEIN through and with the assistance of TD BANK and other co-conspirators used the funds obtained from victim-investors in various ways to conceal the true nature of the fraud and to provide an air of legitimacy to attract additional investments by Coquina and others.  

From April 2009 to September 2009, Coquina purchased nineteen fictitious structured settlement agreements from Rothstein for a total of $37.7 million.  Coquina was told that, upon investing a specified amount, an account would be opened at TD Bank solely for Coquina's funds which could only be transferred to Coquina through the use of a "lock letter" purportedly executed by Rothstein.  According to the complaint, Spinosa later met with Coquina, confirming that there existed "irrevocable restrictions on the Coquina Account that limited disbursements only to Coquina."  However, when Rothstein disappeared and was subsequently arrested in late 2009, there were no funds in the Coquina account, and questions existed as to whether the funds had ever been transferred into the account.

The third count of Coquina's complaint alleges that TD Bank aided and abetted fraud by actively providing substantial assistance to Rothstein's scheme through the use of numerous bank accounts to perpetrate the scheme, the provision of fictitious account statements, and vouching for the legitimacy and safety of the investments with Rothstein.  While proving such a claim is difficult, Coquina has already survived an attempt by TD Bank to dismiss the count, with Judge Cooke finding that Coquina had successfully alleged that TD Bank had knowledge of the scheme and had provided substantial assistance through Spinosa's actions.  

The suit is seeking compensatory and punitive damages against TD Bank, along with Coquina's costs and fees incurred in prosecuting the action.

A copy of Coquina's complaint against TD Bank is here.

Receiver in Trevor Cook Ponzi Scheme Wins Approval to Hire Outside Counsel in Quest for More Assets

The court-appointed receiver tasked with recovering assets for the benefit of victims defrauded by Trevor Cook's $194 million Ponzi scheme has received approval to hire high-powered outside counsel to pursue claims against third-party entities who may have aided and abetted Cook's scheme.  The receiver, R.J. Zayed, was authorized by United States District Judge Michael Davis to retain firms in Texas, New York, and Atlanta who specialize in pursuing complex litigation against entities such as law firms, financial institutions, and accounting firms.  The cost to the receiver: nothing.

Zayed proposes to hire outside counsel on a contingency basis, which is a payment structure in which the hired firm is responsible for the fees and costs associated with pursuing a particular case in return for a specified percentage of any future recovery.  In complex cases, this often entails hundreds of thousands of dollars in foregone legal fees and costs with the expected hope that a recovery or settlement will result.  In his motion to hire outside counsel, Zayed emphasizes this fact, stating that "as a result of this contingent fee structure, the Receiver would gain the expertise of counsel who specialize in the claims at issue while conserving liquid assets of the Receivership."  

Appearing in court with Zayed was William T. Reid IV, whose firm, Reid Collins & Tsai LLP, is one of the firms retained by Zayed.  Reid is a former Assistant United States Attorney who has substantial experience in past and current litigation involving similarly-sized Ponzi schemes.  Also receiving approval were two Atlanta law firms: Doffermyre, Shields, Canfield & Knowles, and Smiley, Bishop & Porter.  Each firm's arrangement with Zayed gives it 17.5% of any pretrial settlement, or 27%-30% if the case proceeds to trial.  

While Zayed declined to specify exactly what third-party entities he intends to pursue, a September 2011 Status Report (the "Report") filing indicated that entities currently under scrutiny include JDFX Technologies, which specialized in trading platforms for the foreign exchange industry; JP Fund Services, a Swiss trading firm; Capricorn, a Swiss asset-management firm; the bankrupt Crown Forex SA, a Swiss foreign currency trader; its former executives, Shadi Swais and Ibrahim Hasanein of Jordan; Gary Saunders, a lawyer in Corona, Calif., and his business associate Holger Bauchinger, a German citizen working as a developer in Panama City, Panama. Additionally, the Report stated that Zayed was investigating claims against third parties including financial institutions and brokerage firms, including Associated Bank of Green Bay, Wis., and Peregrine Financial Group, a major non-clearing U.S. futures commission merchant.  

One of the advantages to hiring outside counsel in the context of a receivership to pursue these claims on a contingency basis is the difficult legal standard required in such third-party claims.  Common causes of action asserted in Ponzi scheme litigation against financial institutions include aiding and abetting fraud and aiding and abetting breach of fiduciary duty.  Each of these causes of action requires either factual allegations giving rise to a strong inference that the entity has actual knowledge of the scheme, or that the entity provided substantial assistance to the scheme.  

Additionally, causes of action asserting fraud or mistake are subject to heightened pleading requirements under Rule 9(b) of the Federal Rules of Civil Procedure, and require that the charging party must plead the allegations giving rise to the claim with particularity.  In other words, vague allegations that an entity should have known of the fraud generally do not suffice.  A recently-issued decision out of a New York federal court illustrates this difficulty:

Statements alleging that that a defendant “should have known that something was amiss with transactions,” even if pled with conclusory statements that the defendant “actually knew something notwithstanding . . . [are] insufficient to support an aiding-and-abetting claim under New York law.  Thus, “as in the context of pleading a primary violation, pleading knowledge for purposes of an aiding and abetting claim requires allegations of facts that give rise to a ‘strong inference’ of actual knowledge.” 

Thus, while certainly not insurmountable, claims based on these causes of action can often entail detailed motion practice and extensive discovery, each of which would strain receivership resources.  Additionally, the experience of the outside firms along with their ability to devote substantial resources to the litigation make Zayed's move a smart one, both for the receivership and for the victims.

A copy of the Receiver's Motion to Retain Outside Counsel is here.

CFTC Obtains Consent Order in $14 Million Forex Ponzi Scheme

The U.S. Commodity Futures Trading Commission announced it had obtained a consent order imposing permanent trading and registration bans against a California man and two companies along with civil monetary penalties totalling nearly $7 million.  Scott Bottolfson and Spirit Investments, Inc. ("Spirit"), both of Encinitas, Calif., and Increase Investments, Inc. ('Increase") of Reno, Nev. were originally named in January 2011 in a CFTC enforcement action charging them with operating a $14 million commodity pool Ponzi scheme.  The consent order, signed by United States District Judge Anthony J. Battaglia, found Bottolfson and his two companies in violation of several provisions of the Commodity Exchange Act.

From 2002 until August 2010, Bottolfson solicited investors to trade commodity futures in two commodity pools, through his companies, Increase and Spirit.  Potential investors were provided with false and/or misleading statements to induce their investment, including the guaranty of a twenty percent return on their investment and that investments were risk-free.  In total, Bottolfson raised approximately $14 million from thirty investors.  Of that $14 million, less than $3 million was placed into commodity pool trading accounts.  $7 million was returned to investors in the form of purported interest payments, and investors suffered the loss of approximately $7 million in principal.  Bottolfson also misappropriated investor funds for his own use.  

The enforcement action is the latest in a record-breaking year for the CFTC, which recently stated that it had filed 99 enforcement actions during Fiscal year 2011, a 74% increase from the previous year.  During that period, the CFTC obtained orders imposing over $290 million in civil monetary penalties, and more than $160 million was ordered in restitution and disgorgement. Each of these sanctions was also more than double the previous year's amount.  

A copy of the Consent Order is here.

Church Pastor Accused of Operating Ponzi Scheme

Several congregants of a Georgia church have filed a civil lawsuit alleging that their pastor convinced them to invest in a Ponzi scheme that defrauded victims out of at least $1 million. Eddie Long, the Bishop of the New Birth Missionary Baptist Church ("New Birth Church") in Lithonia, was accused by ten members of the church of negligence and conspiring to mislead the members through the perpetration of a financial scheme.  The suit, which also names New Birth Church, seeks the return of investor funds, along with punitive damages, attorney's fees and expenses.  

According to the suit, Long hosted "Wealth Tour Live" seminars in which potential investors were promised annual returns of up to twenty percent in exchange for their investment in safe investments.  Investor funds were placed with Ephren Taylor Jr., the former CEO of City Capital Corp. in Chicago.  Taylor was recently named in a lawsuit in a North Carolina federal court seeking class action status on behalf of thousands of similarly situated victims.  In that suit, Taylor is accused of pitching City Capital Corp. to primarily church-going African Americans, promising that their investments would go to help the less-fortunate.  The complaint states that Taylor sought to convince investors that their funds would be used to purchase homes, real estate, and businesses in communities with working class families, both creating new jobs in these communities and also promising to guarantee that investors would double their investment in a twelve-month period.

The North Carolina suit against Taylor specifically describes the alleged scam perpetrated against the New Birth Church members.  According to the suit, Taylor made presentations at New Birth Church, offering investors the opportunity to participate in the "Clean Sweeps" sweepstakes video game machines, and providing at least one investor with a "Certificate of Guaranty" promising that the sweepstakes machine would generate revenues equal to or greater than the investor's contribution.  Interestingly, the complaint does not allege any contribution or participation by Bishop Long; instead, it describes a YouTube video pleading for Taylor to return investor funds, which exceeded $1 million.  

The case is the latest in a wave of Ponzi schemes built on the exploitation of faith-based relationships, known as religious affinity fraud.  Said Joseph Borg, the Alabama securities commissioner and a past president of the North American Securities Administrators Association, "I've seen more money stolen in the name of God than any other way." 

A copy of the lawsuit filed against Taylor is here.

Woman Alleges 'Mexican-Inspired Ponzi Scheme' at California Taco Bell

From poker to picante, it seems the Ponzi scheme has solidified itself as the new fraud du jour.  A California woman has filed a civil complaint alleging that she was fired from her position as an assistant manager at Taco Bell after she refused to stop participating in a "mandatory Ponzi scheme for all employees."  The case, styled Jeorgina Cervantes de Gomez v. Robert Coe, case number 1383277, was filed in California Superior Court on October 17.  Along with back pay, Gomez is also seeking compensatory and punitive damages under the California Labor Code.

Gomez was an assistant manager at a Taco Bell in Goleta, located in Santa Barbara County.  According to the complaint, each employee was required to contribute a small portion of their paycheck.  The complaint states as follows:

"For approximately two years, TB's restaurant manager for the Fairview/Calle Real location, Doralinda Vargas, pressured plaintiff and other subordinates to participate in a secretive, Mexican-inspired Ponzi scheme, sometimes called a 'Tanda.' Ms. Vargas forced each employee to contribute one hundred dollars ($100) from his or her paycheck every payday to fund this illegal scheme. Growing tired of being forced to contribute the money from her paycheck each payday, plaintiff refused to participate any further.
     "On or about June 1, 2011, Ms. Vargas threatened plaintiff with termination if plaintiff did not agree to continuing giving back to Ms. Vargas every payday $100. Plaintiff refused to participate in this unlawful act. As a result, plaintiff's employment was terminated with no notice."

More notable than the allegations is the growing inclination of both the news media and the general public to describe fraudulent schemes as Ponzi schemes.  While scant details are known about Cervantes' complaint other than that reported, the simple extortion of money does not qualify as a Ponzi scheme.  Instead, a Ponzi scheme requires some fraudulent promise of larger returns through a non-existent investment operation.  

According to Black's Law Dictionary, a Ponzi scheme is “[a] fraudulent investment scheme in which money contributed by later investors generates artificially high dividends for the original investors, whose example attracts even larger investments.  Money from the new investors is used directly to repay or pay interest to earlier investors, without any operation or revenue-producing activity other than the continual raising of new funds.”  While the allegations in the complaint, if true, are deplorable and likely criminal, their classification as a Ponzi scheme may be pushing the envelope.