Monday, July 21, 2014

Scott Rothstein Ponzi Scheme: A Settlement, Finally

Posted by Kathy Bazoian Phelps

    The intersection of bankruptcy and forfeiture proceedings can lead to considerable fighting over the assets that were once in the possession and control of the perpetrator. The recent filing of a motion to approve a settlement in the hard fought battle over forfeited assets in connection with the Scott Rothstein case is, therefore, welcome news.

    Litigation between the bankruptcy estate of Scott Rothstein’s law firm, Rothstein Rosenfeldt Adler, and the United States government regarding forfeiture and restitution issues has been ongoing for years. Protracted litigation resulted in an Eleventh Circuit decision in U.S. v. Rothstein Rosenfeldt Adler, P.A. (In re Rothstein Rosenfeldt Adler, P.A.), 717 F.3d 1205 (11th Cir. 2013), which then led to even further litigation. The fight over the forfeited assets in Rothstein has been lengthy and extremely costly.

    In a joint motion filed on July 14, 2014 (attached here), the liquidating trustee of the Rothstein law firm bankruptcy case (the “RRA Trustee”) and the government are seeking approval of a settlement that provides for a division of the property as between the government and the bankruptcy estate. As a result, a portion will be distributed to restitution victims pursuant to the government forfeiture statutes and a portion will be distributed to the creditors of the bankruptcy estate. As previously discussed in this blog, those two categories of claimants are not necessarily the same. See Who Are the Victims in the Bernard Madoff Ponzi Scheme? for a discussion on the distinction.

    The new Rothstein settlement provides, among other things, the following:

1. The RRA Estate shall receive approximately $23 million in cash and assets.

2. The government shall retain about $28 million to be distributed to Qualifying Victims.

3. The RRA Trustee agrees to support entry of a final order of forfeiture which forfeits the Restitution Assets (defined in the agreement) to the Government.

4. The Remaining Assets (defined in the agreement) shall be released to the Trustee for distribution pursuant to the terms of the RRA Plan of reorganization.

5. The RRA Trustee shall also be appointed as the Restitution Receiver and shall distribute the proceeds of the Restitution Assets to the Qualifying Victims.

6. The forfeited assets from the Kim Rothstein case (Scott Rothstein’s currently imprisoned wife) and a few other related criminal cases shall be treated as Remaining Assets.


    In addition to the economic division, an interesting piece of this settlement is the manner in which the parties propose to distribute the forfeited assets. They have agreed to allow the same individual who is the RRA Trustee to serve as the Restitution Receiver. The justification, which seems to be a good one, is:
The Settlement Agreement contemplates that slightly more than $28,000,000 of assets will be finally forfeited and disbursed/restored to Qualifying Victims. In order to ensure that the distribution of these funds to Qualifying Victims and RRA creditors is maximized, the Settlement Agreement contemplates Goldberg being appointed as the Restitution Receiver. The benefit of Goldberg filling that role is that he and his professionals are already aware of and familiar with the collateral source recovery provisions in the RRA Plan. Moreover, as a result of the collateral source reporting that was required by the RRA Plan, Goldberg and his professionals are in the best position to apply, in consultation with the Government and under the District Court’s supervision, the provisions of 18 U.S.C. § 3664(j). Indeed, having a single person responsible for harmonizing distributions from both the RRA Trust and the Rothstein Criminal Case is the most efficient and effective method to ensure that no person receives an amount exceeding their losses.
    This settlement seems to be a practical, economical, and sensible resolution to litigation that has gone on way too long. Both “creditors” of the bankruptcy estate, as defined under the Bankruptcy Code, and “victims,” as defined under the forfeiture statutes, deserve to be paid. It is nice to see two arms of the government cooperate to achieve distributions to both sets of claimants who rightfully deserve compensation. Hopefully this type of practical resolution will serve as an example to the Government, bankruptcy trustees, and federal equity receivers in the future when forfeiture and bankruptcy proceedings collide.

Friday, July 18, 2014

Ponzi Scheme Trustee’s Claws Do Not Always Reach Overseas

Posted by Kathy Bazoian Phelps

     Bankruptcy trustees often sue to avoid and recover fraudulent transfers pursuant to the provisions of the Bankruptcy Code. These are often referred to as “clawback” actions. Transfers of property of a debtor may be avoided pursuant to section 548 and may be recovered from the initial transferee pursuant to section 550(a)(1) or from subsequent transferees pursuant to section 550(a)(2).

     In the Bernard Madoff Ponzi scheme case, the Trustee sued overseas feeder funds that had withdrawn funds from the Madoff scheme (the initial transferees). The Trustee also sued the customers and managers of the feeder funds who were transferred funds from those feeder funds (the subsequent transferees). At first glance, the Trustee’s claims appear to be consistent with the provisions of the Bankruptcy Code.

     A district court recently held, however, that the Trustee may not sue to recover from the subsequent transferees. In an opinion dated July 7, 2014 (attached here), the court held that section 550(a) does not permit “the recovery of subsequent transfers received abroad by a foreign transferee from a foreign transferor.” The court stated:
The Court concludes that (1) the application of section 550(a)(2) here would constitute an extraterritorial application of the statute, and (2) Congress did not clearly intend such an application. Moreover, given the factual circumstances at issue in these cases, even if section 550(a)(2) could be applied extraterritorially, such an application would be precluded here by considerations of international comity. 
     The court evaluated whether the presumption against extraterritoriality should apply and, if so, “whether Congress intended for the statute to apply extraterritorially.” It considered, among other things, the following:

  •  [T]he transaction being regulated by section 550(a)(2) is the transfer of property to a subsequent transferee, not the relationship of that property to a perhaps-distant debtor.
  •  [T]he relevant transfers and transferees are predominantly foreign: foreign feeder funds transferring assets abroad to their foreign customers and other foreign transferees.
  •  Although the chain of transfers originated with Madoff Securities in New York, that fact is insufficient to make the recovery of these otherwise thoroughly foreign subsequent transfers into a domestic application of section 550(a).
  •  [A] mere connection to a U.S. debtor, be it tangential or remote, is insufficient on its own to make every application of the Bankruptcy Code domestic.

    The Trustee is seeking to use SIPA to reach around such foreign liquidations in order to make claims to assets on behalf of the SIPA customer-property estate — a specialized estate created solely by a U.S. statute, with which the defendants here have no direct relationship. Without any agreement to the contrary (which the Trustee does not suggest exists), investors in these foreign funds had no reason to expect that U.S. law would apply to their relationships with the feeder funds.

     The holding of the case appears limited to the use of “section 550(a) to pursue recovery of purely foreign subsequent transfers.”

     The court did, however acknowledge the Trustee’s policy concern that if section 550(a) does not apply extraterritorially, this “would allow a U.S. debtor to fraudulently transfer all of his assets offshore and then retransfer those assets to avoid the reach of U.S. bankruptcy law.” This does seem to be a disturbing prospect. Yet, the court dismissed the argument, stating that, “the desire to avoid such loopholes in the law ‘must be balanced against the presumption against extraterritoriality, which serves to protect against unintended clashes between our laws and those of other nations which could result in international discord.’”

     The court’s solution to this potential intentional fraud problem may be a boon for lawyers in foreign jurisdictions. The court stated, “Assuming that any such intentional fraud occurred, the Trustee here may be able to utilize the laws of the countries where such transfers occurred to avoid such an evasion while at the same time avoiding international discord.” However, a few paragraphs later, the court noted that, for example, BVI courts have prohibited recovery by a feeder fund from its customers under certain common law theories – “a determination in conflict with what the Trustee seeks to accomplish here.” In other words, a trustee can use the laws in foreign jurisdictions to combat actual fraudulent transfers, but may not do so if the laws in those other jurisdictions prohibit such actions.

     The consequences of the decision, particularly if upheld by the Second Circuit or ultimately the Supreme Court, will be the increased use of laws and lawyers in foreign jurisdictions to pursue recovery of transfers that took place overseas. Organizations such as the International Chamber of Commerce's FraudNet, of which the author is a member, are great resources to locate asset recovery specialists in jurisdictions across the globe.