TD Bank Settles Another Rothstein Investor Suit For $70 Million

A hedge fund specializing in arbitrage trading that had invested hundreds of millions of dollars in Scott Rothstein's $1.3 billion Ponzi scheme has reached a settlement valued at nearly $70 million from TD Bank and others it claimed facilitated the scheme.  Platinum Partners Value Arbitrage Fund, L.P. ("Platinum Partners") was one of hundreds of investors in Rothstein's purportedly lucrative business of investing in confidential structured settlements, ultimately investing more than $400 million along with two of its sister hedge funds.  The fund brought claims against TD Bank and others in the aftermath of Rothstein's collapse, claiming the bank played a vital role in Rothstein's scheme.  In the announced settlement, TD Bank will be on the hook for approximately $44 million which, according to Paul Brinkmann of the South Florida Business Journal, brings the bank's financial exposure thus far to roughly $374 million.

The settlement is a welcome reversal in roles for Platinum Partners, which found itself and two partner  funds, Centurion Structured Growth and Level 3 Capital, the target of a $400 million lawsuit by the trustee appointed to recover funds for Rothstein's victims.  The trustee, Herbert Stettin, filed suit in December 2010 and sought more than $400 million - an amount representing the amount of funds that flowed in and out of Platinum during Rothstein's fraud.  Platinum Partners settled with the trustee in June 2012, agreeing to pay $32 million to the bankruptcy estate, which represented the amount of transfers made during the 90-day period preceding the bankruptcy filing in which Rothstein was legally presumed insolvent.  In exchange, Stettin agreed to allow Platinum Partners to hold claims of $28 million, as well as subordinated claims of $26 million.  

Meanwhile, Platinum Partners had joined a multitude of other Rothstein victims in pursuing claims against TD Bank, claiming that the bank and its executives willingly aided Rothstein's scheme.  That strategy had become increasingly popular in the wave of several high-profile settlements by TD Bank, as well as a jury verdict awarding punitive damages.  The adverse verdict served as a powerful incentive for settlement, and the bank has since settled several other suits.

Under the terms of the settlement with Platinum Partners, TD Bank agreed to make a cash payment of $18 million, as well as satisfy the fund's remaining obligation to Stettin of approximately $26 million.  Platinum Partners will also recover its legal fees in pursuing the multi-year litigation.  Additionally, Platinum Partners still has its $54 million in claims submitted to the bankruptcy estate, including an allowed claim with equal priority to other investor-victims of $28 million that is expected to be nearly or fully satisfied out of recoveries by Stettin.  Thus, assuming a payout percentage of 80% or more, Platinum Partners will stand to recover approximately $70 million - a figure that seems even more impressive considering some estimates that the fund recovered all but $19.5 million of its original investment with Rothstein.

TD Bank has been a central focus of Stettin's efforts to formulate an exit plan from bankruptcy that has featured a heavily-debated ban on current and future litigation against TD Bank in exchange for a cash payment to the bankruptcy estate.  The proposal has pitted Stettin and the creditors' committee against a group of investors with pending claims of nearly $300 million against TD Bank who would be 'forced' to 'only' receive whatever payments they would be entitled under a bankruptcy plan.  Stettin supports the plan because victims would be on track to receive close to a 100% recovery - an outcome only possible with the cash payment by TD Bank in exchange for a bar order.  Under a recently proposed version of the plan - one that still includes a bar order - creditors will have the chance to submit their vote in advance of a July confirmation hearing.  

A copy of the Trustee's lawsuit against Platinum Partners is here.

CFTC Sues U.S. Bank For Aiding 'Midwest Madoff' Ponzi Scheme

United States securities regulators launched a lawsuit against a well-known financial behemoth, alleging it allowed an Iowa man dubbed the 'Midwest Madoff' to knowingly misappropriate investor funds as he masterminded a $215 million Ponzi scheme.  The Commodity Futures Trading Commission ("CFTC") filed a complaint in federal court against U.S. Bank National Association ("U.S. Bank"), alleging it played an integral role in the massive Ponzi scheme perpetrated by Russell Wassendorf, Sr. through his company, Peregrine Financial Group, Inc. ("Peregrine").  The CFTC charged US. Bank with multiple violations of the Commodity Exchange Act and requested a variety of relief including court-ordered restitution, disgorgement of gains tied to the fraud, and civil monetary penalties.  

Peregrine was a renowned commodities broker whose founder, Wassendorf, was once considered an icon in the commodities industry.  However, this changed with Wassendorf's arrest in July 2012 following a failed suicide attempt outside Peregrine's headquarters.  In a suicide note he left, Wassendorf confessed to a long-running fraud, and was later indicted, pled guilty, and sentenced to fifty years in prison.  He was ordered to pay more than $215 million in restitution.  

According to the complaint, Peregrine became registered with the CFTC in August 1992, and Wassendorf soon began using U.S. Bank for Peregrine's needs as a result of his previous banking relationship with the bank.  The bank would later maintain more than 30 accounts for Wassendorf and Peregrine, including personal accounts for Wassendorf and his family, Peregrine accounts, and accounts for other Wassendorf businesses.  Over the course of this relationship, Peregrine would deposit more than $300 million of customer funds with U.S. Bank.

Wassendorf enjoyed a preferential status with U.S. Bank due to his wealth and potential as a long-term customer.  This resulted in the bank making unusual concessions to Wassendorf, including allowing him to limit access to an account, with an account number ending in 1845 (the "1845 Account") that held millions of dollars of Peregrine's customer funds, to only him.  Indeed, U.S. Bank's internal computer system carried a memo for the 1845 Account stating that

“Per Russ Wasendorf request no account balance confirmations authorized on acct”

The bank was notified that the 1845 Account was designated as a Commodity Exchange Act Customer Segregated Account, consisting of funds from two primary sources: deposits at its Cedar Falls, Iowa branch, and wire transfers from a Peregrine customer account at JP Morgan.  As a customer segregated account, the 1845 Account was subject to various rules and regulations under the Commodity Exchange Act.

However, according to the CFTC, U.S Bank frequently flouted industry rules and regulations in allowing Wassendorf to use funds from the 1845 Account for a variety of prohibited purposes - effectively allowing him to use the account as Peregrine's commercial checking account.  This included the outflow of millions of dollars to an account related to the construction of Peregrine's new headquarters, more than $5 million to an account for Wassendorf's restaurant, My Verona, and even the transfer of more than $2 million as part of Wassendorf's 2010 divorce settlement.  

The complaint singles out a female employee identified only as "Banker A" for having a close relationship with Wassendorf.  

U.S. Bank has denied responsibility, instead accusing the CFTC of attempting to deflect blame for its failure to detect Wassendorf's fraud.  

A copy of the CFTC's complaint is here.

$11 Million Movie Production Ponzi Scheme Nets 27-Year Sentence for Mastermind

A film producer who promised investors exorbitant returns through the production of independent movies, including one starring reality TV star Flavor Flav, was sentenced to serve 27 years in prison.  Mahmoud "Mike'' Karkehabadi, 55, received the sentence after he was previously convicted on fifty-one criminal counts, including grand theft and the fraudulent sale of securities.  While Karkehabadi was convicted at trial, his business partner, Timothy Cho, was acquitted of all charges.  

Karkehabada, also known as Mike Karkeh, was a partner in Alliance Group Entertainment ("AGE") along with Cho.  AGE produced a total of five movies, each having a crime or mixed martial arts theme, and starring a host of lower level celebrities, including Flavor Flav, Quinton "Rampage" Jackson, and Armand Assante.  Investors were solicited to contribute to the production costs of the movies, under the premise that Karkeh had already secured a lucrative distribution deal and that returns of 18% - 35% were guaranteed - even if the audiences never showed.  When the economy began faltering in 2008, Karkeh told investors that the distribution deal had supposedly fallen apart, and solicited them to 'roll over' their investment into a second film.  In total, 21 investors contributed over $11 million to Karkeh and AGE.

However, the films did not net the exorbitant returns advertised by Karkeh, but instead brought in only $500,000 of revenue.  Faced with returns far less than promised, Karkeh used incoming investor funds to pay distributions of profits and principal to existing investors - a classic hallmark of a Ponzi scheme.  

Ironically, a third co-conspirator, Deanna Ray Salazar, was also involved with an unrelated Ponzi scheme.  She pled guilty last June to her role in the scheme and received a two-year prison sentence.  

Hawaii Father and Daughter Indicted in $8 Million "Parking Lot" Ponzi Scheme

A federal grand jury indicted a Hawaii man and his daughter for carrying out a Ponzi scheme that took in more than $8 million from unsuspecting investors.  George Lindell, 65 , and Holly Hoaeae, 39, charged with thirteen counts of mail fraud, three counts of wire fraud, and one count of conspiracy to commit money laundering.  Each of those counts carries a statutory maximum sentence of twenty years' imprisonment, as well as criminal monetary penalties.  

According to authorities, Lindell and Hoaeae operated the Mortgage Store, which solicited potential investors, many of whom were Maui residents, to invest in what the pair called the "parking lot," which promised to pay interest above that being paid by financial institutions.  Investors were told that their funds would be invested in safe investments such as bonds. Additionally, Lindell and Hoaeae used the Mortgage Store to refinance investor mortgages for amounts well in excess of their existing mortgages.  In total, investors entrusted over $8 million to the pair.

However, Lindell and Hoaeae engaged in little legitimate business, and instead used incoming investor funds to pay existing investors in a classic Ponzi scheme.  The majority of investor funds were used for personal expenditures for the pair, including the construction of a residence in Lahaina, Maui, the purchase of a Lexis automobile, payment of a $27,967 debt on a truck loan, and payment of $28,500 for a New Zealand safari.

The Mortgage Store had filed for bankruptcy in September 2010, listing debts of more than $10 million.  Lindell and Honaeae agreed to surrender $6 million that was obtained from the scheme in a settlement with the bankruptcy trustee.  In a sign that criminal charges might be pending, Lindell agreed in the settlement agreement that some of the transactions were made "with an actual intent to hinder, delay or defraud creditors of The Mortgage Store."

Judge Approves 1% Distribution for Stanford Victims

A federal judge has cleared the way for victims of Allen Stanford's $7 billion Ponzi scheme to receive a first interim distribution amounting to 1% of their estimated losses.  United States District Judge David C. Godbey approved the distribution plan proposed by Ralph Janvey, the receiver appointed to marshal and recover assets for Stanford's victims.  Under Janvey's plan, a total distribution of $55 million will be made to approximately 17,000 claimants holding collective claims exceeding $5 billion.  According to Janvey's attorney, “We will follow it up in a subsequent distribution as the money comes in."

Janvey originally sought approval for a claims process back in November 2011, reporting that the Receivership had $114.5 million of cash on hand and $96.6 million in assets, and estimating that nearly $1 billion of external assets could potentially be recovered for the benefit of victims.  The court approved the proposed claims process in May 2012, and established September 1, 2012 as the deadline by which victims had to submit proof of claim forms detailing their losses.  In January 2013, Janvey proposed his distribution plan, explaining that he had received over 30,000 investor claims with net investor losses of approximately $5.13 billion.   With Judge Godbey's approval, victims can expect to receive a distribution check within 90 days of the date of the order.  

Stanford was convicted of running the second-largest Ponzi scheme in history, and was sentenced to 110 years in prison in June 2012.