Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

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.

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