An appellate court has affirmed a $67 million verdict obtained by victims of Scott Rothstein's $1.2 billion Ponzi scheme against banking giant TD Bank, upholding what is likely the only decision to impose liability on a banking institution for aiding and abetting a Ponzi scheme. The U.S Court of Appeals for the Eleventh Circuit entered an order denying not only TD Bank's post-trial motions but also the imposition of sanctions against the bank for discovery violations deemed "simply incredible" by the trial judge. While the 11th Circuit affirmed the verdict on all grounds, it did acknowledge that the unprecedented recovery by the court-appointed bankruptcy trustee presented a possibility of a "double recovery" that could be addressed by the trial court.
TD Bank had extensive ties with Rothstein, who promised investors the possibility of significant short-term returns through purported confidential settlements with whistleblowers and sexual harassment victims. To convince investors of the legitimacy of his operation, Rothstein claimed that the amount of the alleged settlements had already been deposited into TD Bank trust accounts administered by Rothstein's law firm and which were subject to strict transfer restrictions. Investors were provided with "lock letters" by TD Bank vice president Frank Spinosa attesting to the fact that the transfer restrictions were, in fact, in place and that the claimed balance was correct. However, there were no such transfer restrictions, and Rothstein was able to transfer funds freely. Additionally, rather than containing the significant balance represented in the "lock letter," many accounts contained nominal $100 balances.
Coquina, which is a Texas investment partnership, invested nearly $38 million with Rothstein based on these representations. The partnership made several withdrawals during the course of its relationship with Rothstein, and ultimately lost nearly $7 million when the scheme collapsed. However, despite its losses, Coquina was informed by the court-appointed trustee that it faced claims for the "clawback" of certain withdrawals made before the scheme's collapse. Coquina ultimately settled with the trustee, paying $12.5 million and agreeing that the trustee could recoup up to $18.6 million if Coquina prevailed in its suit against TD Bank.
At trial, a federal jury found in favor of Coquina on its aiding and abetting and fraudulent misrepresentation claims, and awarded $32 million in compensatory damages and $35 million in punitive damages for a total award of $67 million. Following the verdict, the trial judge also imposed sanctions against TD Bank and its counsel for the failure to produce relevant evidence that reflected unfavorably on the bank.
On appeal, TD Bank raised several issues, including the propriety of drawing an adverse inference against Spinosa's invocation of his Fifth Amendment rights during testimony, whether the settlement agreement between Coquina and the trustee was properly admitted into evidence, and whether Coquina's damages claim was proper. The Court addressed each contention, and ultimately found each unpersuasive. Finally, the Court agreed that the trial court's imposition of sanctions, including accepting as true that TD Bank has actual knowledge of the fraud and that its account-monitoring systems were unreasonable, were consistent with the facts in the record.
While the ruling is clearly a win for Coquina, the Court did address the issue of a potential "double recovery" that has been the subject of a TD Bank post-trial motion seeking a reduction in the verdict. The issue arises from the fact that Coquina could potentially receive $25 million not only from TD Bank pursuant to the verdict, but also by virtue of the trustee's allowance of Coquina's $25 million claim in the bankruptcy estate. Due to the trustee's announced liquidation plan providing for the unprecedented 100% recovery by victims, this could potentially present a situation where Coquina could achieve a double recovery. While the Court observed that a Rule 60(b) motion was pending in the trial court and could be addressed at the appropriate time, it did suggest that
If the district court determines that a reduction in compensatory damages is appropriate, the court should also consider whether a proportionate reduction of punitive damages is required.
A copy of the Order is below: