Ponzi schemer Scott Rothstein lured supposedly smart money out of New York hedge funds. Why did they continue doing business with him?
Scott Rothstein was a special kind of Ponzi schemer.
Unlike Bernie Madoff or Allen Stanford, who mostly hurt individual investors, the 49-year-old Rothstein sucked in a billion dollars from sophisticated investors—including New York hedge funds that employed the well-known detective firm Kroll and an onsite inspector at Rothstein's Fort Lauderdale law firm, from which he sold discounted legal settlements with annualized returns as high as 437%. Sadly, the settlements didn't exist.
Two years after Rothstein's scam collapsed, the civil plaintiffs are just getting warmed up. The first jury trial to follow the mess awarded $67 million in January to a group of investors who sued TD Bank, claiming that its employees assisted Rothstein's scam. The U.S. unit of Toronto-Dominion Bank will appeal, but remains a deep-pocketed target for Rothstein victims. The Canadian parent recently set aside a litigation reserve of $255 million. On Thursday, it offered $170 million to settle claims with another group of Rothstein victims. The bank declined to comment on any aspect of this story.
The other deep pockets in the Rothstein lawsuits are the New York hedge funds. Sharing offices on the 54th floor of a tower above Carnegie Hall, the funds—Platinum Partners Value Arbitrage Fund, Centurion Structured Growth and Level 3 Capital Fund—advanced about $440 million to Rothstein, starting in early 2008, and got all but $19 million back before the lawyer fled in a private jet to Morocco in October 2009. After returning, Rothstein pled guilty to racketeering, fraud and money laundering.
Sentenced to 50 years and the forfeiture of $1.2 billion, he began cooperating with federal prosecutors and the trustee in his law firm's bankruptcy. In a December 2011 deposition, Rothstein said he had compromised some hedge-fund employees with cash, strip-club outings and escort services. He also claimed that, to get their money out, the hedge funds helped him attract new investors, after they suspected fraud and realized that Rothstein would need fresh money. The bankruptcy trustee is seeking $423 million from the three hedge funds and another $20 million directly from their principals....MORE