The bankruptcy trustee liquidating Ponzi-scheme operator Scott Rothstein's law firm is suing Toronto-Dominion Bank for allegedly not only ignoring numerous red flags raised by Rothstein's banking practices but for also allowing the imprisoned attorney's $1.2 billion-plus fraud to grow as big and last as long as it did.
Chapter 11 trustee Herbert Stettin on Monday filed the lawsuit against TD Bank in the bankruptcy case of Rothstein Rosenfeldt Adler PA. The Florida law firm went into liquidation upon the collapse of a fraudulent scheme in which Scott Rothstein sold stakes in bogus legal settlements to investors and used the proceeds to fund a lavish lifestyle.
"TD Bank played a central role in this massive fraud by giving Rothstein's settlement program the appearance of legitimacy," Stettin said in court papers. "Without TD Bank's active participation in concert with Rothstein, the Ponzi scheme would not have grown so large nor lasted so long."
According to Stettin, TD Bank aided in the fraud by issuing letters to investors that gave them false assurance that the large sums of money deposited for their benefit were safely stowed in the law firm's bank accounts. In fact, Stettin said, the bank regularly allowed Rothstein to disburse these funds at his discretion. The bank also allegedly prepared letters for investors to confirm bank-account balances that were "nonexistent," the trustee said, adding that the bank's motivation was profit.
"TD Bank did this in order to profit from income and the use of high volumes of money flowing into the bank and from the banking fees and other charges generated from these transactions," Stettin said.
In the suit, filed with the U.S. Bankruptcy Court in Fort Lauderdale, Fla., Stettin seeks to recover about $10 million in funds he says the law firm fraudulently transferred to TD Bank as well as an unspecified amount of damages for the bank's alleged breach of fiduciary duty and negligence. Any recovered proceeds would go toward the law firm's creditors.
TD Bank's attorney in the matter wasn't immediately available for comment Tuesday.
According to the trustee, Rothstein's law firm started off as a small TD Bank customer with three accounts but later opened 26, making the law firm a "VIP client" entitled to such special privileges as priority processing of wire transfers.
One of those many accounts was used to deposit and disburse funds under Rothstein's fraud scheme. Stettin said the large amounts of money flowing in and out did signify, or should have, that these were not in fact legal fees or other legitimate revenues generated by the young, mid-sized, local law firm that had no big legal victories to its name.
"In essence, TD Bank completely ignored the obvious--that the RRA trust accounts were being used in a manner inconsistent with law firm trust account activity and the normal practices and operations of a law firm," Stettin said.
The trustee pointed out such other red flags that he said TD Bank was aware of, from the fact that Rothstein never provided detailed financial data about his law firm to the jewelry, watches, homes, businesses and exotic car collection he flaunted. That's not to mention the bodyguards and elaborate electronic surveillance system Rothstein utilized and the "huge amounts of money" the firm spent to have its name plastered on three sports arenas and two performing arts center as well as on charitable donations.
Rothstein Rosenfeldt Adler has been under Chapter 11 protection since late 2009, around the time its founder was arrested. Rothstein eventually pleaded guilty to running the Ponzi scheme and is now serving a 50-year prison sentence.
