Ponzi Scheme Research Paper
Memorandum to file.
Date: June 24th, 2013.
Subject: Scott Rothstein’s Ponzi scheme.
The purpose of this memo is to document my research on Scott Rothstein’s Ponzi scheme, the biggest fraud case in Florida. Did Scott Rothstein knowingly lie and take money from investors, promising high fake returns, only to benefit himself and his conspirators? How he got away with this scheme without being caught is outlined. I have also included some of the red flags that were missed.
Facts
Rothstein and Stuart Rosenfeldt opened a law firm in 2002 called Rothstein Rosenfeldt Adler. Rothstein was a people person and was able to engage easily with all types of people. His friendship and ability to get along with people high in rank, like Governor …show more content…
Crist, made him even more believable to the public. He went out of his way to please people. He even hosted John McCain in his house. “He was the life of the party and wanted people to love him.” (American Greed, 2009).With his good reputation, it was easy for him to lure more people into the scheme as he had earned a lot of trust from people. His wealth “bought” him power and esteem. Rothstein stole a total of 1.2 billion. (Unites States v. Rothstein, 2009). The Ponzi scheme was carried out over a period of four years from 2005 to 2009.
Discussion
Methodology and steps used by Rothstein.
Scott was able to sweet talk investors into loaning money to his firm’s “clients”. Rothstein was able to pull off the scheme because he did not work alone as there were other people involved. Together, they sold confidential agreements at a discounted rate and promised face value returns to investors. The investor’s money was “used to prepay the clients” who had “pending settlements”. The so called fake clients had “agreed” to a lesser amount upfront since they needed the money urgently. In return, they had to give up their settlements to the firm. According to Rothstein, with the full payment to the firm, he would be able to then give the investors a high return within a short period of time. “The investors were guaranteed a minimum of 20 percent investment returns in as little as three months.” (Wikipedia, n.d)
Rothstein claimed he had opened trust accounts for the investors where the funds were maintained and checked on regularly by designated people. None of the two partners were signatories on the RRA Trust accounts. He opened accounts in different financial institutions and would transfer money back and forth between the accounts. The amount transferred was an estimated 500 million USD. (Brinkmann, 2009). He altered bank statements and online information to make it look like money was still in the accounts. He took money from client’s escrow accounts when he started running out of money to sustain the scheme.
Scott was able to convince investors easily because he was able to create and forge documents, fake judges’ signatures and make the documents look real. When investors inquired on the case settlements, he told them that the clients had won the case but the defendant had transferred the money to Cayman Islands. With his fake court documents, he convinced them he was trying to get the money but they needed to post bonds in order to get the defendants’ money. Investors ended up giving more money. He faked another court order that “allowed” the delay of the return of the funds to the firm. This would in turn delay the return to the investors. Meanwhile, he and his conspirators were taking the money out of the account to maintain the firm’s expenses and their personal extravagant lifestyle.
Signs/clues:
How the partners and public missed the following signs is a mystery. Rothstein spent money carelessly, buying extravagant items and giving money to charities and political campaigns. His extravagant lifestyle was clearly not maintained by his mere $200,000 salary. (Padgett, 2010). “In a 2008 interview at his law firm, Rothstein described himself and told how he controlled all aspects of the firm 's management.” (Wikipedia, n.d). Rothstein worked in a totally controlled environment. He was the only one who controlled the surveillance cameras and microphones in the building. This should have been a big red flag as it shows control to cover up the fraudulent acts.
According to one interviewee who knew him, Rothstein did not know anything about business or investments to earn any confidence from investors. This should have been a red flag. Rothstein sent an email to the lawyers inquiring about criminal extradition to USA or Israel. He also hired former Broward Sheriff Ken Jenne, right after he was released from jail. This should also have triggered some questions or suspicions. It is surprising that the investors did not become suspicious when they were not allowed to meet the clients. When investors were given documentation with all the important information hidden, with the claim the information had to be confidential, they should have questioned just like Sakowitz did.
Another suspicious act to deflect the true source of the ill-gotten funds was when employees were asked to contribute part of their bonuses to political campaigns.
This should have been suspicious .Gifts and lavish items given to employees to gain loyalty and give the appearance of a successful firm should have been another sign. The increase in salary for Debra Villegas within a short period didn’t really match up to her duties. Rothstein’s parents dressed very strangely in expensive and ridiculous stylish clothes for people their age. It was apparent they did not care how they spent the money. “I mean, here 's a 75-year-old man in baggy jeans and an eighty-dollar t-shirt.” (Crandell, 2013) Money was paid to high ranking officials in the police department to deflect scrutiny from the unlawful acts. Police guarded Rothstein’s house round the clock. This should have somewhat given it away since no one in Florida, especially with such a low salary, had round the clock police protection.
The relationship with Bill Rock should have been suspicious because only Bill had access to the checks written for Rothstein’s ventures. (Wikipedia, n.d). Banks were also not paying attention, given the large amount of money that was transferred to and from the trust accounts. Partners should have noticed the money missing from the client’s escrow accounts. Rosenfeldt should have become suspicious when Rothstein didn’t allow him to look at the company books.
Downfall:
After withdrawing a lot of money from the trusts and the firm’s accounts, it became clear to Rothstein there was not enough funds to pay the investors, who had become persistent on getting their money back. According to America Greed documentary, he would have needed about 3million USD each month to keep up with the scheme. Alan Sakowitz blew the whistle and reported his suspicion to the FBI. (Grimm, n.d). His scheme completely fell apart right after his suicidal text to his partners, when he fled to Morocco. When he returned to Florida, his firm filed a suit against him and the investigation of the whole case got intense. This eventually led to his arrest and charges.
Conclusion
Legal dictionary defines fraud as, “A false representation of a matter of fact—whether by words , conduct, false or misleading allegations, concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.” Using this definition, Rothstein committed fraud. He knowingly deceived investors and took their money.
Even though Scott Rothstein was involved in the largest Ponzi scheme in Florida, he did not act alone. He had a lot of help from some people in his firm and other high ranking people. Unfortunately, the entire 1.2 billion USD he and his conspirators stole was not fully recovered. “The federal government seized Rothstein 's personal assets, which rough estimates were placed around $30 million.” (Burstein, J., & McMahon, 2010). There were a lot of clues that could have given the fraud away had anyone been paying attention. This is a financial disaster that could have been avoided.
References
Brinkman, P. (2009, November 20). Rothstein lawsuit most detailed to date. South Florida Business journal. Retrieved from http://www.bizjournals.com/southflorida/stories/2009/11/16/daily74.html?page=3
Burstein, J., & McMahon, P. (2010, November 1) Scott Rothstein scandal: One year later. Sun Sentinel. Retrieved from http://articles.sun-sentinel.com/2010-11-01/news/fl-scott-rothstein-anniversary-20101031_1_ponzi-schemer-rothstein-rosenfeldt-adler-rothstein-s-ponzi
CNBC: American Greed. $1.2 Billion Scam: Ft. Frauderdale: [video file] Retrieved from http://www.cnbc.com/id/100000033
Crandell, B. (2013, March 12). The Ultimate Ponzi: Scott Rothstein Book Excerpts Reveal Juicy Details. Sun sentinel. Retrieved from http://www.huffingtonpost.com/2013/03/12/scott-rothstein-book-the-ultimate-ponzi_n_2862093.html
Fraud. (nd) Retrieved June 26, 2013, from Legal dictionary: http://legal-dictionary.thefreedictionary.com/fraud.
Grimm, F. (nd) The Man who blew the whistle on Scott Rothstein. Miami Herald Blog. Retrieved from http://miamiherald.typepad.com/grimm_truth/2010/09/the-man-who-blew-the-whistle-on-scott-rothstein.html Koppel, N. (2010, January 27, 2010): Former Florida Lawyer Pleads Guilty to Ponzi scheme. Wall street journal. http://online.wsj.com/article/SB10001424052748704094304575029013194919020.html
LBNstudio. (2009, November 10). Scott Rothstein case is not about structured settlements [Video file]. Retrieved from http://www.youtube.com/watch?v=4IV8HmUIWc4
Padgett,T. (2010,January 18). Florida 's Mini-Madoff: Scott Rothstein 's fall. Time.US. Retrieved from http://www.time.com/time/nation/article/0,8599,1953650,00.html
Scott W. Rothstein. (n.d) Retrieved June 26, 2013, from Wikipedia: http://en.wikipedia.org/wiki/Scott_W._Rothstein
Time line: Key dates in the life of attorney Scott Rothstein. Sun Sentinel. Retrieved from http://www.sun-sentinel.com/news/broward/rothstein/sfl-scott-rothstein-timeline,0,729580.story
United States of America, V. Scott W. Rothstein, (U.S D.C .2009). Retrieved from http://www.justice.gov/usao/fls/programs/VictimWitness/USvRothstein/20091131.Information.pdf.
.
Date: June 24th, 2013.
Subject: Scott Rothstein’s Ponzi scheme.
The purpose of this memo is to document my research on Scott Rothstein’s Ponzi scheme, the biggest fraud case in Florida. Did Scott Rothstein knowingly lie and take money from investors, promising high fake returns, only to benefit himself and his conspirators? How he got away with this scheme without being caught is outlined. I have also included some of the red flags that were missed.
Facts
Rothstein and Stuart Rosenfeldt opened a law firm in 2002 called Rothstein Rosenfeldt Adler. Rothstein was a people person and was able to engage easily with all types of people. His friendship and ability to get along with people high in rank, like Governor …show more content…
Crist, made him even more believable to the public. He went out of his way to please people. He even hosted John McCain in his house. “He was the life of the party and wanted people to love him.” (American Greed, 2009).With his good reputation, it was easy for him to lure more people into the scheme as he had earned a lot of trust from people. His wealth “bought” him power and esteem. Rothstein stole a total of 1.2 billion. (Unites States v. Rothstein, 2009). The Ponzi scheme was carried out over a period of four years from 2005 to 2009.
Discussion
Methodology and steps used by Rothstein.
Scott was able to sweet talk investors into loaning money to his firm’s “clients”. Rothstein was able to pull off the scheme because he did not work alone as there were other people involved. Together, they sold confidential agreements at a discounted rate and promised face value returns to investors. The investor’s money was “used to prepay the clients” who had “pending settlements”. The so called fake clients had “agreed” to a lesser amount upfront since they needed the money urgently. In return, they had to give up their settlements to the firm. According to Rothstein, with the full payment to the firm, he would be able to then give the investors a high return within a short period of time. “The investors were guaranteed a minimum of 20 percent investment returns in as little as three months.” (Wikipedia, n.d)
Rothstein claimed he had opened trust accounts for the investors where the funds were maintained and checked on regularly by designated people. None of the two partners were signatories on the RRA Trust accounts. He opened accounts in different financial institutions and would transfer money back and forth between the accounts. The amount transferred was an estimated 500 million USD. (Brinkmann, 2009). He altered bank statements and online information to make it look like money was still in the accounts. He took money from client’s escrow accounts when he started running out of money to sustain the scheme.
Scott was able to convince investors easily because he was able to create and forge documents, fake judges’ signatures and make the documents look real. When investors inquired on the case settlements, he told them that the clients had won the case but the defendant had transferred the money to Cayman Islands. With his fake court documents, he convinced them he was trying to get the money but they needed to post bonds in order to get the defendants’ money. Investors ended up giving more money. He faked another court order that “allowed” the delay of the return of the funds to the firm. This would in turn delay the return to the investors. Meanwhile, he and his conspirators were taking the money out of the account to maintain the firm’s expenses and their personal extravagant lifestyle.
Signs/clues:
How the partners and public missed the following signs is a mystery. Rothstein spent money carelessly, buying extravagant items and giving money to charities and political campaigns. His extravagant lifestyle was clearly not maintained by his mere $200,000 salary. (Padgett, 2010). “In a 2008 interview at his law firm, Rothstein described himself and told how he controlled all aspects of the firm 's management.” (Wikipedia, n.d). Rothstein worked in a totally controlled environment. He was the only one who controlled the surveillance cameras and microphones in the building. This should have been a big red flag as it shows control to cover up the fraudulent acts.
According to one interviewee who knew him, Rothstein did not know anything about business or investments to earn any confidence from investors. This should have been a red flag. Rothstein sent an email to the lawyers inquiring about criminal extradition to USA or Israel. He also hired former Broward Sheriff Ken Jenne, right after he was released from jail. This should also have triggered some questions or suspicions. It is surprising that the investors did not become suspicious when they were not allowed to meet the clients. When investors were given documentation with all the important information hidden, with the claim the information had to be confidential, they should have questioned just like Sakowitz did.
Another suspicious act to deflect the true source of the ill-gotten funds was when employees were asked to contribute part of their bonuses to political campaigns.
This should have been suspicious .Gifts and lavish items given to employees to gain loyalty and give the appearance of a successful firm should have been another sign. The increase in salary for Debra Villegas within a short period didn’t really match up to her duties. Rothstein’s parents dressed very strangely in expensive and ridiculous stylish clothes for people their age. It was apparent they did not care how they spent the money. “I mean, here 's a 75-year-old man in baggy jeans and an eighty-dollar t-shirt.” (Crandell, 2013) Money was paid to high ranking officials in the police department to deflect scrutiny from the unlawful acts. Police guarded Rothstein’s house round the clock. This should have somewhat given it away since no one in Florida, especially with such a low salary, had round the clock police protection.
The relationship with Bill Rock should have been suspicious because only Bill had access to the checks written for Rothstein’s ventures. (Wikipedia, n.d). Banks were also not paying attention, given the large amount of money that was transferred to and from the trust accounts. Partners should have noticed the money missing from the client’s escrow accounts. Rosenfeldt should have become suspicious when Rothstein didn’t allow him to look at the company books.
Downfall:
After withdrawing a lot of money from the trusts and the firm’s accounts, it became clear to Rothstein there was not enough funds to pay the investors, who had become persistent on getting their money back. According to America Greed documentary, he would have needed about 3million USD each month to keep up with the scheme. Alan Sakowitz blew the whistle and reported his suspicion to the FBI. (Grimm, n.d). His scheme completely fell apart right after his suicidal text to his partners, when he fled to Morocco. When he returned to Florida, his firm filed a suit against him and the investigation of the whole case got intense. This eventually led to his arrest and charges.
Conclusion
Legal dictionary defines fraud as, “A false representation of a matter of fact—whether by words , conduct, false or misleading allegations, concealment of what should have been disclosed—that deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.” Using this definition, Rothstein committed fraud. He knowingly deceived investors and took their money.
Even though Scott Rothstein was involved in the largest Ponzi scheme in Florida, he did not act alone. He had a lot of help from some people in his firm and other high ranking people. Unfortunately, the entire 1.2 billion USD he and his conspirators stole was not fully recovered. “The federal government seized Rothstein 's personal assets, which rough estimates were placed around $30 million.” (Burstein, J., & McMahon, 2010). There were a lot of clues that could have given the fraud away had anyone been paying attention. This is a financial disaster that could have been avoided.
References
Brinkman, P. (2009, November 20). Rothstein lawsuit most detailed to date. South Florida Business journal. Retrieved from http://www.bizjournals.com/southflorida/stories/2009/11/16/daily74.html?page=3
Burstein, J., & McMahon, P. (2010, November 1) Scott Rothstein scandal: One year later. Sun Sentinel. Retrieved from http://articles.sun-sentinel.com/2010-11-01/news/fl-scott-rothstein-anniversary-20101031_1_ponzi-schemer-rothstein-rosenfeldt-adler-rothstein-s-ponzi
CNBC: American Greed. $1.2 Billion Scam: Ft. Frauderdale: [video file] Retrieved from http://www.cnbc.com/id/100000033
Crandell, B. (2013, March 12). The Ultimate Ponzi: Scott Rothstein Book Excerpts Reveal Juicy Details. Sun sentinel. Retrieved from http://www.huffingtonpost.com/2013/03/12/scott-rothstein-book-the-ultimate-ponzi_n_2862093.html
Fraud. (nd) Retrieved June 26, 2013, from Legal dictionary: http://legal-dictionary.thefreedictionary.com/fraud.
Grimm, F. (nd) The Man who blew the whistle on Scott Rothstein. Miami Herald Blog. Retrieved from http://miamiherald.typepad.com/grimm_truth/2010/09/the-man-who-blew-the-whistle-on-scott-rothstein.html Koppel, N. (2010, January 27, 2010): Former Florida Lawyer Pleads Guilty to Ponzi scheme. Wall street journal. http://online.wsj.com/article/SB10001424052748704094304575029013194919020.html
LBNstudio. (2009, November 10). Scott Rothstein case is not about structured settlements [Video file]. Retrieved from http://www.youtube.com/watch?v=4IV8HmUIWc4
Padgett,T. (2010,January 18). Florida 's Mini-Madoff: Scott Rothstein 's fall. Time.US. Retrieved from http://www.time.com/time/nation/article/0,8599,1953650,00.html
Scott W. Rothstein. (n.d) Retrieved June 26, 2013, from Wikipedia: http://en.wikipedia.org/wiki/Scott_W._Rothstein
Time line: Key dates in the life of attorney Scott Rothstein. Sun Sentinel. Retrieved from http://www.sun-sentinel.com/news/broward/rothstein/sfl-scott-rothstein-timeline,0,729580.story
United States of America, V. Scott W. Rothstein, (U.S D.C .2009). Retrieved from http://www.justice.gov/usao/fls/programs/VictimWitness/USvRothstein/20091131.Information.pdf.
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