Marking the end of a dispute that had already made its way to the U.S. Court of Appeals for the Eleventh Circuit, the U.S. Department of Justice and Rothstein Rosenfeldt Adler ("RRA") bankruptcy trustee announced they had reached an agreement concerning distribution of approximately $50 million in criminal forfeiture proceeds. In a press release from the U.S. Attorney's Office for the Southern District of Florida, it was announced that $28 million will go to qualifying victims in the criminal case, while approximately $21 million will revert to the RRA bankruptcy estate. Victims of Scott Rothstein's $1.2 billion Ponzi scheme, whose law firm RRA was forced into bankruptcy after his scheme collapsed, are already expected to recover 100% of their net losses.
The dispute over forfeited assets traces its roots to the immediate aftermath of Rothstein's scheme's collapse in late 2010. In an effort to secure available assets for victims of Rothstein's scheme, authorities sought forfeiture of a significant amount of real and personal property traceable to Rothstein, including houses, luxury boats and vehicles including a Bugatti, bank accounts, 304 pieces of jewelry, and investments collectively valued at approximately $50 million. The RRA bankruptcy trustee, Herbert Stettin, immediately objected on the basis that the forfeited proceeds would be used solely to compensate victims of Rothstein's Ponzi scheme and not all of the creditors who suffered losses as a result of RRA's collapse.
While the RRA trustee maintained that certain of the forfeited assets, including bank accounts in the name of Rothstein's law firm, rightfully belonged in the bankruptcy estate, U.S. District Judge James Cohn sided with the government. After Stettin appealed the ruling to the Court of Appeals for the Eleventh Circuit, a ruling in June 2013 overturned the district court's decision and ruled that the funds in the bank accounts were commingled with the firm's receipts from clients and thus not subject to forfeiture directly; rather, the government was left with the option of resorting to other substitute asset provisions. Thus, while the decision technically left the government an alternate option, many viewed the ruling as a clear victory for Stettin and the RRA estate.
The agreement announced yesterday marks an end to the multi-year feud over the division of the forfeited assets. While both the DOJ and the RRA estate will retain roughly half of that amount, the press release emphasizes that Rothstein's Ponzi victims will recoup 100% of their losses under the liquidation plan proposed by Trustee Stettin. This outcome is unprecedented in Ponzi scheme jurisprudence, and was possible in large part due to the significant contributions made by TD Bank which was accused of playing an indispensable part of Rothstein's scheme. The bank's role has been costly, with over $250 million in legal settlements and judgments to date as well as a payment of $72 million to the bankruptcy estate. Ironically, TD Bank's settlement with the RRA trustee allowed it a lower-priority claim that could allow it to collect if additional funds remain after payment of higher-priority claims.