Rothstein's Bank - Not Victims - Will Get Proceeds Of Auctioned Luxury Items

An upcoming auction of luxury items seized from convicted Ponzi schemer Scott Rothstein, including a 12-carat diamond ring, the most expensive women's Rolex ever made, and a $550,000 watch, will likely bring in millions of proceeds payable to an unlikely beneficiary: the Canada-based bank which has paid hundreds of millions of dollars in settlements for its role in Rothstein's scheme. A Florida jeweler is tasked with auctioning off the remaining part of Scott Rothstein's extensive jewelry collection - an assortment built with no limits using stolen funds from hundreds of duped investors. However, while the proceeds would typically go to pay back Rothstein's victims, that is not the case as those victims have already been made 100% whole through an unprecedented recovery effort by bankruptcy trustee Herbert Stettin. As such, in a final twist of irony, the bank which has paid dearly for its role in the fraud will start to recoup its $132.5 million claim recognized by the trustee.

The Scheme

Rothstein touted lucrative returns to investors through the purchase of highly confidential legal settlements purportedly stemming from claims of sexual harassment, whistle-blower, and qui tam actions against large corporations. According to Rothstein, while the alleged settling defendant had already deposited the settlement funds with Rothstein’s firm, an investor could “purchase” the right to receive that settlement at a discount. With the investor sworn to secrecy and enamored by the prospect of an lucrative return, there was a built-in incentive for all parties to remain tight-lipped. Potential investors were assured that their funds would remain safe in a firm trust account held at TD Bank, with some provided "lock letters" authored by bank officials purportedly assuring them that their funds were impervious to ill will or influence.

As would later emerge in spectacular fashion, Rothstein's alleged secretive settlements were bogus and nothing more than what would later be revealed as the largest Ponzi scheme in Florida history. Indeed, as he would later confide in authorities as part of one of the most memorable (and effective) post-conviction cooperation campaigns, Rothstein pointed the finger at numerous individuals who he claimed shared blame for the scheme, including Frank Spinosa - the then-regional Vice President of the TD Bank branch in Ft. Lauderdale. As alleged by Rothstein (and later by both civil and criminal authorities), Spinosa played an integral role in the scheme through a series of actions that included making false representations to investors and authoring bogus "lock letters." Spinosa later pleaded guilty to wire fraud conspiracy and is scheduled to begin a 30-month prison sentence this Thursday.

Unprecedented Recovery

The court-appointed bankruptcy trustee, who assumed his position in late 2009 with Rothstein's once-prominent law firm shuttered and Rothstein having fled with $15 million, announced a liquidation plan in February 2013 that sought to return 100% of victim losses - a remarkable outcome that was possible only due to TD Bank's culpability in Rothstein's scheme. At the time of the proposed distribution plan, TD Bank was the subject of numerous lawsuits brought by Rothstein victims and had already been on the losing end of several suits to the tune of at least $132.5 million in damages. Stettin sought and received approval to largely exclude those victims who had already recovered from TD Bank from participating in the liquidation plan.

The funds available for the proposed liquidation plan also included a $72.45 million payment from TD Bank to resolve all claims Stettin could have brought against the bank. The payment essentially acted to stop the increasing spigot of lawsuits brought by Rothstein victims as it was conditioned upon the Court's entry of a "bar order" which would forever enjoin any current or future lawsuits against the bank. The settlement essentially ensured that Stettin would have available funds to make good on his intention to make Rothstein's victims 100% whole.

The liquidation plan was approved by the Court in July 2013, albeit as a result of a marathon negotiating session that naturally resulted in the extraction of additional settlements from TD Bank. At the time the plan was approved, TD Bank's total toll from Rothstein's fraud stood in the hundreds of millions of dollars - including $257 million in settlements for lawsuits brought by one attorney alone.

TD Bank's Subordinated Claim

The liquidation plan provided that TD Bank was permitted a $132.45 million subordinated claim, an amount which represented the current total of settlements and jury verdicts rendered against the bank at the time the liquidation plan was proposed. TD Bank's claim was subordinated to the lowest possible priority, meaning that it would not be entitled to receive any distribution on its claim until all other claims had been paid.

The Auction

With the Rothstein saga in its seventh year, the bankruptcy estate is seeking to wind down and close the estate. That means that Michael Goldberg, a court-appointed liquidating trustee, is entrusted with auctioning off the remainder of a collection of luxury assets that once symbolized the rock-star lifestyle enjoyed by Rothstein with investor funds. The auction, which will take place in early April, includes a 30-piece jewelry collection fit for a king, including:

Wife Kim Rothstein's 11.8 carat diamond engagement ring;
A Zenith Zero-G Tourbillion watch that cost $550,000 to make;
a Harry Winston watch;
a 12.08 carat yellow canary diamond ring;
a women's Rolex watch estimated to be the most expensive ever made; and
A bracelet with at least 1,350 diamonds.

The jewelry collection is appraised at roughly $10 million, although it is estimated the auction will bring in roughly 20%-40% of that amount. Participants can also bid on a nearly-10,000 square foot unfinished mansion in Boca Raton that was custom built by a Rothstein victim and later purchased by Rothstein. The mansion, which has an elevator, atrium, pool, spa, and waterfall, has several rooms that are still unfinished. The price for the mansion will be set at $2.5 million.

The conclusion of the auction will mark a closing chapter in a saga that has gripped the south Florida scene for the better part of a decade. The resulting efforts by the court-appointed trustee have resulted in significant accolades, including the largest Ponzi scheme to see its victims receive 100% compensation. It is then perhaps fitting that TD Bank, which has paid dearly for its involvement with Scott Rothstein, will perhaps receive the last token payment.

More Ponzitracker coverage of the Rothstein scheme is here.