Seizure of Ponzi assets sparks 11th Circuit debate

John Pacenti

Daily Business Review

01-08-2013

Criminal forfeiture law and bankruptcy jurisprudence have been on a collision course ever since federal prosecutors said they had the authority to dole out millions of dollars recovered from imprisoned lawyer Scott Rothstein for victims of his Ponzi scheme.

The opposing views were thrown into sharp relief during Dec. 6 arguments before the U.S. Court of Appeals for the Eleventh Circuit. The Daily Business Review, a Daily Report affiliate, received a recording of the hearing from the court.

"Your problem is how in the world does criminal forfeiture proceedings adjudicate rights of claimants in the bankruptcy estate?" Circuit Judge Gerald Bard Tjoflat asked Assistant U.S. Attorney Madeleine R. Shirley at the hearing in Miami.

Tjoflat rejected the government's argument that it could seize assets in the accounts of Rothstein's former Fort Lauderdale, Fla., law firm, Rothstein Rosenfeldt Adler, under the auspices of the bankruptcy court.

U.S. District Judge James Cohn in Fort Lauderdale gave the prosecution jurisdiction over Rothstein's yachts, cars and other items, which constitute the majority of the assets in dispute. He also handed prosecutors the power to distribute some of the $2 million left in several RRA trust accounts.

The court-appointed bankruptcy trustee for the law firm's estate contested Cohn's rulings and appealed. The government estimates the amount in dispute at about $50 million.

In the meantime, victims of Rothstein's settlement financing scam uncovered in late 2009 haven't received a penny. The stakes for the government and the bankruptcy bar could not be higher.

The case pits the power of prosecutors to seize the assets of a convicted criminal against the bankruptcy court's power to administer the assets of an estate.

"It has greater ramifications," said attorney William Scherer, a partner at Conrad & Scherer in Fort Lauderdale who represents numerous Rothstein victims. "I can't believe the federal government would not fight this case all the way to the U.S. Supreme Court because it turns forfeiture law on its head."

Tjoflat made it clear at the hearing he felt U.S. Attorney Wifredo Ferrer's office overreached and misused the forfeiture statutes. Prosecutors argued before Cohn that they could distribute assets to victims more efficiently and more cheaply than bankruptcy court, which could give deference to creditors instead of victims and must carve out attorney fees.

'No Consequence'

"When you frustrate the bankruptcy law, you frustrate all of the creditors of the bankrupt estate and their rights," Tjoflat said.

Attorney Sharon Kegerreis, a partner with Berger Singerman who represented the trustee at the hearing, argued the estate had rights to tangible assets such as the real estate because Rothstein used money from RRA accounts to purchase them.

U.S. Bankruptcy Judge Raymond Ray issued an automatic stay protecting all assets that was usurped by Cohn's rulings, she argued.

"Any orders entered by the district that affected the property of the estate are automatically void under the bankruptcy law of this circuit," she said. "We did everything we could on the part of the trustee to bring that issue to the district court's attention, but it was rejected."

"The district court didn't even want you in the case," Tjoflat responded. "At one point, I understand the government was resisting the trustee's appearance."

Also on the three-judge panel hearing the issue was Circuit Judge Beverly Martin and U.S. District Judge Susan Bucklew of Tampa, sitting by designation.

Rothstein, once a law firm chairman who wielded powerful political connections, is serving a 50-year prison sentence for masterminding a $1.2 billion scam using forged court settlements.

He funneled investors' funds through the bank accounts of his law firm. That money belongs to his victims, not his creditors, Shirley told Tjoflat at the hearing.

She asserted RRA earned "a mere $12 million" in 2009 while Rothstein brought into the firm's accounts $724 million from unwitting investors.

"These are proceeds of Rothstein's criminal offenses," she said. "The fact that he deposited them into someone else's account is of no consequence."

Police powers

Shirley was repeatedly interrupted by Tjoflat, who is considered a bankruptcy maven on the Eleventh Circuit, writing precedent-setting decisions for the court on the issue since joining it in 1970.

He pressed Shirley for a case where a judge in a criminal forfeiture case adjudicated claims in a bankruptcy matter before asking both sides to submit additional memoranda.

Things got testy with Tjoflat when Shirley said the government had "police powers" to seize the assets of wrongdoers.

Tjoflat asked: "The government's police powers? The government is like a state now. It has police powers?"

Shirley replied: "Yes, it does."

Tjoflat asked: "It does? Where in the Constitution?"

Shirley said: "To remove proceeds from wrongdoers, yes. The United States has police powers."

Tjoflat demanded: "Give us a case for that, too, under the Constitution—police powers."

Scherer, who also received a recording of the hearing, called it a "hot bench."

"I'm sure glad I wasn't up there trying to argue, I tell you," he said.

But for Scherer, the resistance from the 11th Circuit judge means only the distribution delays will continue. The lawyer has secured multimillion-dollar settlements for investors with the banks Rothstein used, but no money has arrived from either the government or the trustee.

"It seems to me this whole argument is over a few million," he said. "The idea of the government giving back to the victims on a pro rata basis was appealing to my clients because they would get it back without going through the cumbersome bankruptcy process."

John Pacenti writes for the Daily Business Review, a Daily Report affiliate in Miami.