A Florida bankruptcy judge has ruled that a former New York senator did not have a valid claim to participate in the claims process for victims of Scott Rothstein's $1.4 billion Ponzi scheme. Alfonse M. D'Amato, a New York senator from 1981 to 1999, had invested $1 million with a fund that invested heavily with Rothstein. United States Bankruptcy Judge Raymond Ray agreed with the court-appointed trustee, Herbert Stettin, that D'Amato's claim was "duplicative" and that he lacked standing to participate in the claims process established for investors that invested directly with Rothstein.
D'Amato originally invested $1 million with the Banyan Income Fund ("Banyan Fund"), which had invested over $775 million with Rothstein as its largest investor. Banyan solicited investors for Rothstein's "employee settlement financing", touting the investment as a lucrative "niche market" that "lacks visibility due to confidentiality issues." The Banyan Fund later was pushed into bankruptcy, and the co-founders, George Levin and Frank Preve, were later charged by the Securities and Exchange Commission for multiple violations of federal securities laws relating to their solicitation of investors for Rothstein's fraud. Levin also previously agreed to surrender the bulk of his estimated $100 to $200 million in assets to the Rothstein bankruptcy estate.
Stettin objected to D'Amato's claim, arguing that D'Amato did not make any 'investments' with Rothstein, but rather with Banyan Fund. This logic flows from recent court decisions involving investors in feeder funds of Bernard Madoff's massive Ponzi scheme, where those 'indirect' investors were not permitted to recover from the bankruptcy estate because they were not customers of Madoff. A recent Second Circuit Court of Appeals case cited several factors in support of this logic, including that the indirect investors:
- Had no direct relationship or accounts with the firm;
- Were not identified in the firm's books and record;
- Had no property interest in the assets invested by the feeder fund; and
- Lacked control over the feeder fund's investments.
Thus, because D'Amato had already filed a claim in the Banyan Fund bankruptcy, Stettin argued that the claim in the Rothstein bankruptcy was duplicative and, ultimately, unwarranted. D'Amato never filed a response to Stettin's objection.
Stettin has recently proposed a distribution plan that he believes could fully compensate investors for their losses.
A copy of Stettin's objection is here.
A copy of the Order sustaining the objection is here.