“All Ponzi schemes do the same thing: They explode at the end,” says convicted con man Scott Rothstein. While his $1.2 billion Ponzi scheme blew up in 2009, the debris is still falling to earth. In an attempt to get his 50-year sentence reduced, Rothstein is naming accomplices and detailing exactly how his scheme worked.
The now-disbarred South Florida lawyer is in protective custody while he cooperates with government investigators. And he’s testifying in civil lawsuits, brought by investors and the court-appointed trustee of his bankrupt law firm, to recover money from banks and hedge funds that allegedly aided the fraud. Over two weeks of depositions in December, Rothstein implicated lawyers, hedge funds managers, bankers, police officers, and his uncle. “His testimony fills in the blanks and ties everything together into a nice, neat package,” says attorney Charles H. Lichtman of Berger Singerman, who represents the trustee. Richard A. Sharpstein, a veteran criminal defense lawyer and former Florida state prosecutor, calls the case “the greatest show on earth. It has just everything—sex, drugs, rock ’n’ roll, bribery, greed at the highest levels.”
In a related trial where Rothstein didn’t testify, an investor group sued Toronto-Dominion Bank (TD), saying it led Rothstein victims to believe their money was safe as he depleted accounts. On Jan. 18 a jury ordered the bank to pay the group $67 million. The bank is disappointed with the verdict, says a spokeswoman, Rebecca Acevedo, “and is considering all of its options.”
For four years, Rothstein persuaded investors—mostly hedge funds and wealthy families in New York, Florida, and Texas—to buy stakes in what he said were payouts from settlements of sexual-harassment and workplace discrimination lawsuits. The suits weren’t real: He’d fabricate the cases from scratch, using forged documents and elaborate ruses, such as having an accomplice pose as a bank officer. The scheme fell apart just after Halloween in 2009 when he couldn’t lure enough new investors to pay earlier ones. After fleeing to Morocco, Rothstein returned to the U.S. Two years ago he pleaded guilty to five federal counts of racketeering, money laundering, and wire fraud.
In December, Rothstein, 49, emerged for questioning before 35 lawyers in a Miami courtroom. He donned polo shirts and jeans that his lawyer bought at Target (TGT), a far cry from his former designer look. Rothstein was known for what he called his “rock star” lifestyle. He was married in the Versace mansion in Miami Beach—Florida’s then-governor, Charlie Crist, was a guest—and his car collection included a Rolls-Royce, a Bugatti, two Lamborghinis, and a Maserati. In more than 2,700 pages of transcripts released on the website of the law firm Conrad & Scherer, which is representing a large group of investors, Rothstein describes how his bling, along with plenty of cash, helped him seduce accomplices. “We were handing out money like Santa Claus hands out candy canes to anybody that needed it for our purposes,” he testified, saying he stored as much as $1 million in cash in an office credenza.
Rothstein kept many accounts at Gibraltar Private Bank & Trust. He testified that while his frequent deposits, withdrawals, and overdrafts raised suspicions, he had two bank officials “in my pocket.” After Gibraltar’s chairman and CEO, Steven D. Hayworth, told him that the bank doesn’t investigate its shareholders, Rothstein said, he invested $5 million in privately held Gibraltar. Rothstein said he wooed John Harris, a former vice-president at the bank, with private plane flights and expensive watches, and that Harris helped him by juggling funds between Rothstein’s accounts to ward off queries from Gibraltar’s compliance investigators. “The only thing my client did was go to a Dolphins game with a high-end client,” says Harris’s attorney, Michael S. Popok. “It’s not criminal, and it’s not fraud.” Miami attorney Eugene E. Stearns, who represents Gibraltar and Hayworth, says Rothstein is a “pathological liar” and that the bank routinely investigates new investors.
Rothstein also used TD Bank because some of his investors liked working with a large, established institution. He testified that he recruited Frank Spinosa, a vice-president at the bank, to create misleading documents. Rothstein recounted rewarding Spinosa with a large envelope, containing $50,000 to $75,000 cash, that he slid across a table at lunch: “I said, ‘Keep doing the right thing by us, many thanks.’ ” Spinosa, who is no longer at the bank, invoked his Fifth Amendment right against self-incrimination during recent testimony. “We unequivocally deny that he had knowledge of or participated in Rothstein’s Ponzi scheme,” says Sam Rabin, Spinosa’s attorney.
Federal prosecutors charged Rothstein’s uncle, William Boockvor, with conspiring with unnamed TD Bank employees to provide investors with “fraudulent bank statements.” Prosecutors said in a court document that they expect him to plead guilty. Acevedo, the TD Bank spokeswoman, says, “We fundamentally disagree with many of the characterizations contained in Mr. Rothstein’s depositions.”
Challenged about his veracity during the deposition, Rothstein replied: “If I lie and get caught lying, even a little bit, I will die in prison.” That line isn’t enough to establish his credibility, says Benedict P. Kuehne, a white-collar criminal defense attorney in Florida. “A good prosecutor and some hardworking investigators are going to have to corroborate his assertions.” Mark Nurik, Rothstein’s lawyer, says there’s no guarantee the testimony will lead to a reduced sentence. “Most of the precedent is in other types of crimes,” he says. “Nobody to my knowledge has provided as much cooperation” in an investment fraud.
When it came to public corruption, Rothstein had to hold back. He was among Florida’s most prominent Republican donors—he gave to Democrats, too—and he sat on the state’s judicial nominating committee. In the depositions, Rothstein said he bribed judges, politicians, and cops. “The police also were sleeping with my escorts,” Rothstein said. “Mob guys, law enforcement, even judges from time to time, not federal judges, would show up.” A federal prosecutor who sat in on the depositions stopped Rothstein from identifying potential offenders, evoking a privilege that allows them to restrict testimony that might compromise active investigations.
So far seven people besides Rothstein have been charged, and Rothstein may spill even more if a state judge approves a pending request for a second deposition. With so much testimony, attorneys and prosecutors have started matching up Rothstein’s words with other evidence in the case. “You then have to follow the money trail to see if it bears fruit,” says Steven B. Caruso, an attorney who represents investors in white-collar fraud cases. He says cooperators typically lead investigators on a “wild goose chase,” though each case is unique. As more cases move to trial, it will be up to juries to decide whether Rothstein gave a damning glimpse into networks of fraud, or if his testimony was just more deception from a consummate con man.