Rothstein's "Independent Asset Verifier" Indicted On Wire Fraud Charges

A south Florida investment advisor who purportedly served as an "independent asset verifier" for investors in Scott Rothstein's massive $1.2 billion Ponzi scheme has been indicted on a dozen fraud charges. Michael Szafranski, 36, faces one count of wire fraud conspiracy and eleven counts of wire fraud in a newly-unsealed indictment that was returned by a grand jury several weeks ago.  The charges, which carry a potential sentence of up to decades in prison if Szafranski is convicted, are notable not only because of the sheer number of charges but also because they are the first to test prosecutors' theory that a ten-year, not five-year, statute of limitations applies.  

Scott Rothstein is currently serving a 50-year prison sentence in an undisclosed location after pleading guilty to the largest Ponzi scheme in Florida's history that ultimately took in more than $1 billion from investors.  Rothstein touted hefty returns from purported investments in confidential pre-suit settlements, using his position as chairman of one of the fastest growing law firms in south Florida to bolster his credibility while simultaneously flaunting his newfound wealth.  Rothstein fled to Morocco in late October 2009 when the scheme was on the verge of collapse - a country lacking an extradition treaty with the U.S. - only to later return to face the music.  His extensive cooperation with authorities ultimately led to his placement in the Witness Protection program, and his subsequent assistance has resulted in over two dozen additional arrests.

Szafranski, who once worked for the now-defunct brokerage Bear, Stearns & Co., Inc., was hired in or around 2008 by several New York hedge funds to act as an "independent asset verifier" to verify the authenticity of the deals Rothstein was peddling.  However, Szafranski soon allegedly switched from his position of impartiality to become close cohorts with Rothstein and actively began soliciting investors for the scheme.  Rothstein himself testified during 2011 depositions that he paid Szafranski handsomely, including several million dollars in post-dated checks, and extensively wined and dined him.  According to Rothstein,

"There was a point in time when he [Szafranski] had a pretty good idea. There was a point in time when he absolutely knew, and then there was a point in time when he was bringing in investors into something he knew didn't exist."

As an example, Rothstein recounted a time during 2008 when Szafranski questioned him about similarities between signatures in legal documents.  In another instance, Szafranski is said to have accompanied Rothstein and another familiar cohort, Stephen Caputi, to a TD Bank branch where Caputi masqueraded as a bank official.  The indictment alleges that Szafranski ultimately was responsible for bringing more than $200 million of new investments into Rothstein's scheme.  

First Test of Extended Statute of Limitations For Fraud "Affect[ing] a Financial Institution?"

Szafranski becomes the first person charged after the five-year anniversary of the collapse of Rothstein's scheme this past October - a noteworthy event not only because of the duration since Rothstein's scheme, but also because many had speculated that the five-year statute of limitations governing many of the likely criminal charges some of Rothstein's co-conspirators might face might also expire.  However, prosecutors indicated their intent to rely on 18 U.S.C. 3293, which provides for an extended 10-year statute of limitations for certain offenses, including wire fraud and mail fraud, that "affect a financial institution."  

The operative question thus becomes whether or not Szafranski's conduct "affects a financial institution."  Court decisions attempting to elucidate the meaning of this directive have largely done so in a boroad context; the test is not whether any actual loss resulted to a financial institution, but rather whether the conduct caused an "increased risk of loss."  As the 7th Circuit so eloquently observed, 

‘‘[j]ust as society punishes someone who recklessly fires a gun, whether or not he hits anyone, protection for financial institutions is much more effective if there’s a cost to putting those institutions at risk, whether or not there is actual harm.’’

United States v. Serpico, 320 F.3d 691, 694-95 (7th Cir. 2003).  However, such breadth is not unlimited; the more attenuated or or remote one's conduct is in relation to the institution can have a corresponding effect on the viability of such a claim.  

Rothstein's scheme is unique in that a national banking institution, T.D. Bank, played a key role in the scheme.  Rothstein has testified that his relationship with a T.D. Bank Vice President, Frank Spinosa, was essential to perpetuating and legitimizing the scheme. Spinosa was charged in October 2014 with six fraud counts for his role in the scheme, and T.D. Bank has paid hundreds of millions of dollars in legal costs and settlements.  Given the integral role T.D. Bank played in Rothstein's scheme, it certainly may serve as the basis for prosecutors' argument that the fraud materially "affect[ed] a financial institution."

Szafranski's next court appearance is scheduled for February 17, 2015.  While Szafranski becomes the 29th person to be charged in the wake of Rothstein's scheme, some expect further arrests.  Chuck Malkus, author of a best-selling book chronicling Rothstein's rise and fall, has indicated his sources expect several more arrests in the coming months.  According to Malkus, "this Rothstein web could easily hit three dozen [arrests]."

A snippet of emails between Szafranski and Rothstein, excerpted from a lawsuit filed against Bank of America by certain of Rothstein's victims, is embedded below.

Emails by jmaglich1