By Steve Viuker
It was a Ponzi scheme without precedent, making headlines in newspapers throughout the United States – and it wasn’t helmed by Bernie Madoff. Instead, it was a South Florida lawyer named Scott Rothstein, and what made this scheme different from any before it was that a bank was ordered to pay as part of the settlement.
At a recent conference in New York City held by the Miami-based Association of Certified Financial Crime Specialists, Marc Nurik, the attorney for Rothstein and David Mandel, the attorney for Coquina Investments, spoke about the crime.
Toronto-based TD Bank owes an investment group $67 million for its role in a $1.2 billion Ponzi scheme that was operated by now-disbarred attorney Rothstein. Now serving a 50-year prison sentence after pleading guilty, the 49-year-old lawyer has been cooperating with federal prosecutors.
The verdict came in a lawsuit filed by Coquina Investments, based in Corpus Christi, Texas. It was the first to go to trial of several pending lawsuits filed by wronged investors against the bank and others.
According to reporting by The South Florida Sun Sentinel, the scheme was one of the largest frauds in South Florida history and triggered the failure of the Fort Lauderdale law firm Rothstein, Rosenfeldt and Adler. Rothstein paid bribes to politicians, judges and law enforcement officials, and he raised thousands of dollars for the campaigns of many state and national politicians.
Testimony and court documents show that Rothstein used an account at a TD Bank branch as an integral part of the scheme. Conspirators in his scheme allegedly posed as TD Bank employees, and one of Rothstein’s associates devised a fake TD Bank website on which fake account balances were posted for investors.
Mandel said key TD Bank employees knew of the fraud and assisted Rothstein in assuring investors their money was sound. In a sworn deposition, Rothstein claimed he gave former TD Bank vice president Frank Spinosa more than $50,000 to ignore signs of illegal activity.
Called to testify in the Coquina trial, Spinosa invoked his Fifth Amendment right against self-incrimination 150 times.
“TD Banks’s ALM program at the time was stunningly incompetent,” said Mandel at the recent conference. “There were numerous violations of the bank secrecy act. It was like the bank took the regulatory guidelines and threw them in the garbage. The bank even violated it’s own internal policies and controls. Throughout the entire scheme, there is no evidence that the bank identified any transactions as suspicious.
“Only after the Ponzi scheme collapsed did TD Bank investigate any of the wire transfers,” said Mandel. “TD’s AML department couldn’t identify money laundering if they were hit in the head with a baseball bat. But being negligent does not equal aiding and abetting fraud.”
“The scheme collapsed roughly on Halloween 2009 and we filed the lawsuit in March 2010,” said Mandel. “We went to trial on a rocket sled for a federal case on Nov. 8, 2010, and got the verdict on Jan. 8, 2012. The reason we went to federal court was that we also brought RICO charges, which were dismissed. But aiding and abetting fraud worked out very well for us.”
The Association of Certified Financial Crime Specialists (ACFCS) reported that on Sept. 28, U.S. District Judge Marcia G. Cooke closed the door on any lingering hope that TD Bank may have had in her courtroom to diminish the size of the verdict, which included $35 million in punitive damages, or to retry the case. Cooke’s “Omnibus Order on Post-Trial Motions” rejected more than a dozen TD Bank arguments on why it deserved a new trial, ranging from flawed jury instructions to improperly-awarded damages.
The ACFCS said the die was cast against TD Bank in an Aug. 3 ruling by Cooke that established that the bank knew about Rothstein’s fraud and had maintained unreasonable money laundering and fraud controls. Cooke reminded the bank repeatedly in her new order of that any error was “harmless” in light of her ruling that it is “established” that TD Bank had “actual knowledge of Rothstein’s fraud.”
And in a scene right out of Hollywood, the Wall Street Journal reported a top Barclays compliance official, who was notified in 2008 about problems brewing within the bank, is now in a similar position at another major bank.
Stephen Morse was the head of compliance at Barclays Capital, the U.K. lender’s investment-banking arm. He was warned that Barclays was trying to fudge the London interbank offered rate and regulators criticized the department headed by Morse for failing to act on employees’ concerns about manipulation.
In late 2011, Morse became head of compliance for TD Bank Group.