Rothstein Funds in Firm Account Not Subject to Forfeiture

Funds held in bank accounts of convicted Ponzi schemer Scott Rothstein’s bankrupt law firm can’t be forfeited to the government, a federal appeals court said.

The money in the law firm accounts, mixed with receipts from clients at the time Rothstein was charged, isn’t subject to forfeiture, the Atlanta-based U.S. Court of Appeals said today, reversing the lower court and handing a victory to the trustee of the law firm’s Chapter 11 proceeding.

The funds are so intermingled that it’s difficult to determine which money is from the Ponzi scheme and which is from the legitimate business of now-defunct Fort Lauderdale, Florida-based Rothstein, Rosenfeldt & Adler PA, which included billings from 70 attorneys, the court ruled.

“The government, standing in Rothstein’s shoes, may appear in the Chapter 11 proceeding and lay claim to Rothstein’s share of law firm assets that survive bankruptcy,” U.S. Circuit Judge Gerald B. Tjoflat wrote for the appellate panel.

Rothstein is serving a 50-year sentence for selling investors stakes in sex- and employment-discrimination cases that turned out to be non-existent. The scheme imploded in the fall of 2009. He pleaded guilty to five counts of money laundering, fraud and racketeering in 2010.

Involuntary Bankruptcy

Creditors started an involuntary bankruptcy against Rothstein Rosenfeldt Adler just before prosecutors indicted Rothstein, who co-founded the firm.

As part of criminal forfeiture proceedings, prosecutors claimed law firm bank accounts, contending they contained proceeds from the scheme. Prosecutors acknowledged that the accounts contained funds of the firm not tainted with fraud that were comingled with fruits of the Ponzi scheme.

After the federal district court sided with the government, the law firm’s Chapter 11 trustee, Herbert Stettin, appealed.

Tjoflat said today that proceeds of fraud used to acquire other property can be forfeited only when they can be traced.

The government had said forfeited money would be turned over to swindled investors, after deducting costs. Which creditors recover, and how much, could be different under distributions made in bankruptcy rather than by the government.

There is a July 11 confirmation hearing set for court approval of the Chapter 11 plan proposed by Stettin. The plan is based in large part on a $72.4 million settlement payment to be made by TD Bank NA in exchange for a waiver of lawsuits.

The appeal is In re Rothstein Rosenfeldt Adler PA (U.S. v. Rothstein), 11-10676, U.S. Court of Appeals for the 11th Circuit (Atlanta). The Chapter 11 case is In re Rothstein Rosenfeldt Adler PA, 09-bk-34791, U.S. Bankruptcy Court, Southern District Florida (Fort Lauderdale).

(Updates with excerpt from opinion in fourth paragraph.)
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