Miami Federal Judge Sanctions TD Bank, Law Firm for "Simply Incredible" Discovery Errors During Rothstein Trial

A Florida federal court judge imposed sanctions against TD Bank and its law firm, Greenberg Traurig, for "willfully" hindering and obfuscating the production of evidence that painted a much more culpable role of TD Bank in Scott Rothstein's $1.2 billion Ponzi scheme.  The order by United States District Judge Martha G. Cooke comes after the successful attempt by a Rothstein investor, Coquina Investments, to hold TD Bank liable for its participation in Rothstein's fraud.  A federal jury deliberated for four hours in January 2012 before rendering a $67 million verdict against TD Bank, including the imposition of punitive damages.  

The dispute arose concerning the sufficiency of TD Bank's participation in discovery, the court-supervised exchange of information in a lawsuit.  One of Coquina's central contentions was that TD Bank knew that Rothstein was a high-risk customer, but ignored the warning signs associated with the fraud in favor of the lucrative relationship it had with Rothstein.  During the trial, TD Bank maintained that it had not designated Rothstein as a "High Risk" customer, which would have required enhanced due diligence by the bank including robust monitoring and scrutiny.  In support, TD Bank offered Rothstein's Customer Due Diligence Form into evidence, which did not contain any indication that Rothstein was considered a high-risk customer.  This distinction was emphasized by the bank's testifying expert, and played a key role in its defense.  Many observed that the jury award could have been much higher had Rothstein indeed been a high-risk customer.

Coquina's attorney, David Mandel of Mandel & Mandel, is also representing another Rothstein victim in a related trial against TD Bank.  That case, Emess Capital v. TD Bank, not only features the same charges pursued by Coquina, but also possible treble damages under the Racketeering Influenced and Corrupt Organizations Act (RICO).  RICO was originally used primarily against organized crime defendants, but has recently been used to target white collar crime.  During ongoing discovery in that case, Mandel's team discovered that TD Bank had produced Rothstein's Customer Due Diligence Form, the same one it produced in the Coquina trial, albeit with an important distinction - the newly-produced Form had a bright red band at the top that read "HIGH RISK".  According to Mandel, "the “HIGH RISK” designation appears to have been blacked out and omitted from" the form produced in the Coquina trial.  A comparison of the documents is helpful:

 

Attacking the previously-produced form as a "sanitized" version of the document, Coquina sought sanctions against TD Bank and Greenberg Traurig ("Greenberg"), seeking:

1. sanctions as determined by the Court;
2. the referral of TD Bank to the United States Attorney's Office for possible obstruction of justice charges; and
3. referral of defense counsel to the Florida Bar for an investigation into their role, if any.

Coquina also alleged that documents known as "Standard Investigative Protocols" were withheld from it, produced several months after the verdict was reached.  The documents had been hotly contested during trial and the subject of at least one motion for sanctions.  Judge Cooke held several days of hearings that featured testimony from TD Bank employees and several of the Greenberg attorneys involved (TD Bank ceased using Greenberg after the verdict).  Mandel scoffed at the insinuation that the omission of the "high-risk" denotation was a copying error, stressing that the multiple errors were not "a series of coincidences", but instead "Rambo litigation tactics." 

In her 30-page ruling, Judge Cooke eloquently summarized the nature of the dispute:

In many ways, this is a case of too many cooks spoiling the broth. Over 200 Greenberg Traurig attorneys were involved in this case. There were separate teams of Greenberg Traurig lawyers to handle banking issues, document production, and pretrial and trial practice. TD Bank retained two different firms to work on different aspects of the Rothstein fallout, but the firms did not have any mutual coordination. One of the firms, Sullivan & Cromwell, then hired a consultant to perform work, which was relevant to the Rothstein litigation, but no one ever informed Greenberg Traurig. As a result, it often times appears that this litigation was conducted in an Inspector Clouseau-like fashion. However, unlike a Pink Panther film, there was nothing amusing about this conduct and it did not conclude neatly. 

After a thorough review of the alleged discovery violations, Judge Cooke concluded that sanctions were warranted against Greenberg and TD Bank for a "pattern of discovery violations" that deprived Coquina of the ability to "drive[] home" to the jury that Rothstein's account warranted additional scrutiny.  Noting that Coquina faced several post-trial motions challenging the sufficiency of the evidence out forth against TD Bank, Judge Cooke ordered that several facts, including that TD Bank’s monitoring and alert systems were unreasonable and that TD Bank had actual knowledge of Rothstein’s fraud, would be established as true for those actions.  The second finding concerning actual knowledge is particularly damaging to TD Bank, as many previous attempts to hold financial institutions liable under these theories fell short of the heightened standard of knowledge required to impose liability.  

Additionally, Judge Cook also ordered Greenberg and TD Bank to pay Coquina's fees and costs incurred in preparing its Fourth and Fifth Motions for Sanctions, as well as fees and costs associated with any litigation resulting from TD Bank's notice of the existence of the Standard Investigative Protocol documents.  A specific request for those fees is due from Coquina's counsel on or before August 23, 2012.  As to Greenberg's attorneys, Judge Cooke found that none had acted willfully or in bad faith, and declined to impose individual sanctions.

TD Bank indicated it plans to appeal Judge Cooke's ruling, as well as the jury verdict.

A copy of the Order is here.

A copy of Coquina's Motion for Sanctions is here.

Additional coverage of the Rothstein Ponzi scheme is here.

Paul Brinkmann, a reporter for the South Florida Business Journal, has also provided detailed coverage of the Ponzi scheme.  You can view his articles here.

Madoff Trustee Seeks to Make Second Distribution to Victims - But With a Billion Dollar Catch

The trustee appointed to recover assets for victims of Bernard Madoff's infamous Ponzi scheme has sought court approval for a second distribution of $2.4 billion that, if approved, will fully satisfy nearly 90% of outstanding approved claims.  The move was made possible after the trustee, Irving Picard, obtained two recent favorable outcomes freeing up billions of dollars in contested funds, as (1) the United States Supreme Court refused to hear arguments relating to the method used to calculate victim losses, and (2) a final non-appealable order was entered approving the $5 billion settlement with the estate of Jeffrey Picower.  If approved, the distribution stands to dwarf the approximately $300 million doled out to investors in the first distribution in September 2011, where the majority of funds available were held in reserve pending the outcome of various legal challenges.  However, while those challenges have been resolved, a new dispute has taken center stage concerning whether victims are entitled to a time-based upwards adjustment in the value of their claim.  While Picard proposes a second distribution of $2.4 billion, he states that a single unresolved objection to his distribution procedure will result in the reduction of the second distribution by nearly $1 billion.  

As of June 30, 2012, Picard and his team had received over 16,000 customer claims, with approximately 2,436 of those claims being "allowed" and having a total value of $7.47 billion.  In addition to the first distribution in September 2011 which represented a roughly 4% payout, Madoff victims with allowed claims have also received up to $500,000 each from the Securities Investor Protection Corporation ("SIPC"), which provides protection against the failure of registered broker-dealers.  Those payouts from SIPC have totaled over $800 million, which alone satisfied nearly 900 claims asserted by investors.  

While the net equity calculation and Picard settlement disputes were settled, over 1,000 investors have objected to Picard's decision not to adjust the value of losses based on the amount of time each investor's funds were invested with Madoff's brokerage ("Time-Based Damages").  The objectors assert several bases for this contention, including that they are entitled to prejudgment interest at a statutory rate of 9%.  Picard calls these arguments "specious at best", noting that there is no basis in the Securities Investor Protection Act ("SIPA") nor has any court construed SIPA to provide for Time-Based Damages.  According to Picard,

SIPA is designed to return customer property to customers, rather than compensate them for injuries caused by a broker’s fraud.  Claims for breach of contract or fraud are “not within the protection afforded by the Act,” but rather are general estate claims.

Additionally, Picard also takes exception to the statutory prejudgment interest rate of 9%, arguing that it has "no relation to normal interest rates in the commercial world."  He points to a recent opinion out of the Southern District of New York, Sriraman v. Patel, which observed that the 9% rate was "absurd" and "effectively creates a windfall for plaintiffs".  A 9% interest rate would also reward those who had long-term investments with Madoff at the expense of shorter-term investors, for the annual interest would allow those investors to recoup their original investment much quicker than the short-term investors.  

Were Picard not forced to maintain reserves while the Time-Based Damages issue was resolved, he states he would be able to distribute a pro rata distribution of 41.286% of each customer's allowed claim. Maintaining reserves for Time-Based Damages of 9% cuts that figure in half, with a proposed pro rata distribution of 20.563% while the dispute is pending.  In an effort to compromise, Picard contacted various objecting claimants, asking whether they would agree to maintain reserves representing Time-Based Damages of 3%, a figure slightly higher than the consumer price index.  Picard received several responses, some which agreed and some which objected.

Despite the objections received, Picard decided to move forward with maintaining reserves to account for Time-Based Damages of 3%, which would result in a distribution representing 33.541% of each customer's allowed claim with incorporated Time-Based Damages of 3%.  This would represent an average payment of $1.975 million for each of the 1,229 allowed claims.  However, mindful of the likely delays associated with an appeal of the distribution, Picard conditions this distribution on the absence of any unresolved objections to the motion.  Should any objections be made and remain unresolved, Picard planned to submit an order that would establish the amount of reserves for Time-Based Damages at (i) 9%, (ii) an amount agreed to by the parties, or (iii) a percentage directed by the court.

In the Motion, Picard also provides an update on the status of the $2.2 billion forfeited by Jeffrey Picower to the Department of Justice ("DOJ"), which was in addition to the $5 billion paid to the bankruptcy estate.  Picard was appointed by the DOJ to serve as special master in the distribution of those funds, which are likely to go to "many of the customers to whom the Trustee proposes to distribute pursuant to this Motion."  Thus, in addition to the over-$8 billion allocated to the Customer Fund for distribution to victims, an additional $2.2 billion would remain available for a future distribution.  

Any objections to the Motion are due by August 8, 2012.  A hearing has been scheduled for August 22, 2012 at 10:00 A.M.

A copy of the Distribution Motion is here. 

Fingerprint Match in Vegas DUI Stop Leads to Arrest of German Man Suspected of $100 Million Ponzi Scheme

A German man who had been a fugitive for the past five years following the accusation that he mastermnded a $100 million Ponzi scheme was arrested last week after a fingerprint match from a DUI stop in Las Vegas prompted the interest of American and German authorities.  Ulrich Felix Anton Engler, 51, was arrested by U.S. immigration authorities last week and is currently awaiting extradition to Germany to face multiple criminal charges.  A warrant was issued by a German court for Engler's arrest in February 2007, charging him with multiple criminal charges carrying a maximum prison sentence of twenty years.  

From June 2003 to December 2004, Engler owned and operated Private Commercial Office ("PCO").  Engler, through PCO, solicited investments from investors worldwide by promising significant investment returns through 'conservative' day trading of securities on the New York Stock Exchange.  Potential investors were told that Engler had developed powerful trading software that could analyze approximately 5,000 stock trades per second, which therefore enabled Engler to capture profits before other similarly situated traders.  Based on these representations, investors deposited over $150 million into bank accounts owned by Engler.  

Austrian securities regulators issued a notice to investors in November 2006 alerting them to the fact that Engler and PCO were not authorized to provide investment advice or manage client portfolios.  Wachovia, which serviced Engler's accounts, was notified of this notice, but failed to close Engler's accounts until January 2008.  By then, the account had been depleted to a balance of $53,000.  After Engler became a fugitive, a group of PCO creditors filed an involuntary petition for bankruptcy against Engler and PCO, and a trustee was appointed on April 30, 2008.  A suit was filed on behalf of investors against Wachovia (now known as Wells Fargo) on December 15, 2011, alleging numerous causes of action including aiding and abetting breach of fiduciary duties and unjust enrichment.   

Engler had been a fugitive for several years when he was arrested in February 2011 for suspicion of driving under the influence in Las Vegas, Nevada.  After Engler's fingerprints matched those supplied by German authorities, U.S. authorities began secretly investigating Engler, discovering that he was operating a similar fraudulent scheme in Las Vegas under the assumed name of Joseph Miller.  After his arrest last week, authorities executed a search warrant on a storage facility rented by Engler in southern Nevada, where they discovered a stash of more than 1,000 pieces of artwork.  Authorities are continuing to investigate Engler's activities in his time as a fugitive.

Upon learning of Engler's arrest, the court-appointed bankruptcy trustee, Robert Tardif, Jr., sought court approval to interview Engler at his place of incarceration before his deportation in a request known as a Rule 2004 examination.  That motion was granted today by United States District Judge Michael G. Williamson, who ordered that Tardif would be able to interview Engler prior to any deportation or extradition.  

A link to the website maintained by the bankruptcy trustee is here.

A copy of the class action lawsuit filed against Wells Fargo is here. 

SEC Sues Pennsylvania Man Who Facilitated $100 Million Ponzi Scheme

The United States Securities and Exchange Commission ("SEC") initiated a civil enforcement action against a Pennsylvania man for his role in funneling at least $30 million in investor funds into a $100 million foreign currency Ponzi scheme.  Emanuel L. Sarris, and his company, Sarris Financial Group, Inc. ("Sarris Financial") were charged with multiple violations of federal securities laws in their solicitation of investors for the Kenzie Fund, which defrauded investors worldwide out of over $100 million.  The SEC is seeking injunctive relief, disgorgement of ill-gotten proceeds, and civil monetary penalties.  

According to the SEC, Sarris provided estate planning and insurance sales to investors through Sarris Financial.  By soliciting existing Sarris Financial clients and holding numerous seminars and "free dinners", Sarris convinced over 70 individuals to invest over $30 million with the Kenzie Funds, making a variety of misrepresentations designed to lend an air of legitimacy to the investment.  For instance, Sarris told investors that he was independent of the Kenzie Funds and that his advice was unbiased and objective.  Additionally, Sarris represented that he had performed due diligence on the Kenzie Funds, and that he had personally seen the Funds' trading and banking records.

However, each of these representations was false.  In reality, Sarris received hundreds of thousands of dollars in salary as an employee of the Kenzie Funds, and also was paid approximately $1.5 million in incentive fees based on the amount of assets under management attributable to Sarris.  Sarris also never saw any foreign currency trading records or communicated with Kenzie's bankers.  Instead, Sarris ignored numerous red flags about the safety and legitimacy of the Kenzie Funds, including that some clients often received different returns for the same time period, and that the telephone number for the Funds' outside auditor had been disconnected since 2006.  Additionally, on at least two occasions, Sarris proposed to Kenzie executives that investor redemption requests be funded by using investor funds. Nevertheless, Sarris continued to solicit new investors for the Kenzie Funds.

The SEC obtained an emergency restraining order and asset freeze against the Kenzie Funds in June 2010.  Shortly thereafter, the operator of the Kenzie Funds was ordered to pay $44 million in disgorgement, along with a $150,000 civil penalty.

A copy of the complaint is here.

South Carolina Man Pleads Guilty to $90 Million Ponzi Scheme

A former city councilman agreed to plead guilty to charges that he operated a Ponzi scheme that bilked investors out of at least $60 million.  Ronnie Wilson, of Anderson County, South Carolina, pled guilty before U.S. District Judge J. Michelle Childs to two charges of mail fraud during a hearing Monday in a South Carolina federal court.  Wilson was arrested in April and charged with multiple counts of mail fraud, which carries a maximum prison sentence of twenty years per charge and up to a $250,000 fine.  A sentencing date has not yet been set.

According to authorities, Wilson operated Atlantic Bullion & Coin, Inc., ("ABC") from at least 2001 through 2012, telling investors they could expect above-average returns through profits earned from the purchase and sale of silver futures contracts.  To convince investors of the scheme's legitimacy, Wilson represented that all silver purchased would be held in safe-keeping at a Delaware depository.  In total, Wilson raised approximately $90 million from over 1000 investors in 25 states.  

However, Wilson failed to purchase a sufficient amount of silver to reflect the funds raised from investors.  Instead, a majority of investor funds were used for a variety of unauthorized purposes, including personal expenses of Wilson and his family and to make Ponzi-style payments representing fictitious interest to investors.  Authorities estimate that Wilson lost at least $60 million of the $90 million raised from investors.

In addition to the criminal action, Wilson and ABC are also the subject of an enforcement action filed by the U.S. Commodity Futures Trading Commission.   That proceeding, which is pending, seeks rrestitution to defrauded investors, disgorgement of ill-gotten gains, injunctive relief, and civil monetary penalties.  

Wilson remains free on $1 million bond.  The court-appointed receiver, Beattie B. Ashmore, indicated that he has met with Wilson several times during his investigation, but at this point, "would paint a very dim picture" in terms of recovery.