Last month we wrote about the Commodity Futures Trading Commission’s unprecedented
lawsuit against U.S. Bank for aiding and abetting the $1.2 billion fraud
perpetrated by Russell Wasendorf, Sr., that resulted in the collapse of
Peregrine Financial Group. It was an
opening salvo by a major U.S. regulator against a firm that did not fall within
the traditional umbrella of the CFTC’s jurisdiction.
Adopting a similarly aggressive enforcement strategy, the
Securities and Exchange Commission has charged TD Bank with violating several
sections of the Securities Act for assisting the convicted Florida attorney,
Scott Rothstein, in perpetrating a massive Ponzi scheme. Rothstein’s scheme is now infamous. Between 2005 and 2009, he used his South
Florida-based law firm, Rothstein, Rosenfeldt and Adler, P.A., to sell
non-existent discounted settlements to unsuspecting investors. In particular, he claimed to represent
plaintiffs who had reached confidential settlements that would be paid out in
periodic distributions over an extended period of time. He told investments that his purported
clients wanted lump sum payments and were willing to sell their settlements at
a discounted rate. The settlements did
not exist, and Rothstein’s investors lost enormous sums of money.
In furtherance of his scheme, Rothstein maintained several
trust accounts at TD Bank, where the settlement proceeds were purportedly
held. A Regional Vice President of the
bank falsely represented to investors that TD Bank restricted the movement of
the settlement funds in those accounts for the exclusive benefit of the
investors. He also issued false “lock
letters” stating that the accounts were irrevocably restricted so that the bank
would distribute the funds only to specific bank accounts belonging to the
investors. Additionally, the bank also
falsely assured investors that the trust accounts did maintained the account
balances that Rothstein said they did.
Rothstein has been punished for perpetrated his vast
Ponzi scheme. He was disbarred by the
Florida Supreme Court and convicted by the U.S. District Court and sentenced to
50 years in prison. Federal regulators
also sprang into action. In 2012, the
SEC initiated an enforcement action against two individuals who directed the
largest number of investors to Rothstein.
Moreover, the Financial Crimes Enforcement Network (FinCen), an arm of
the U.S. Department of Treasury, is the administrator of the Bank Secrecy Act
that has the authority to assess civil monetary penalties against domestic
financial institution. FinCen hit TD
Bank with a $37.5 million fine for the BSA failures that contributed to
Rothstein’s fraud.
In an unusual move, the SEC, which does not regulate
national banks, nonetheless has brought an enforcement action against TD Bank
for violating various sections of the Securities Act in connection with its
role in the Rothstein fraud. For
example, the SEC charged TD Bank with violating Section 17(a)(2) of the Act,
which prohibits any person, in the offer or sale of any security, from obtaining
money or property by means of any untrue statement or omission of material fact. The agency also charged the bank with violating
Section 17(a)(3), which prohibits any person, in the offer and sale of any
security, from engaging in any transaction, practice or course of business that
operates as a fraud or deceit upon the purchaser.
TD Bank chose not to fight the SEC’s charges. Rather, it entered into a settlement with the
Commission that agreed to entry of a cease-and-desist order and a civil
monetary penalty of $15 million, in addition to the separately assessed FinCen
penalty. Additionally, TD Bank had to
agree that, with regard to any lawsuit against it by a victim of Rothstein’s
fraud, the bank would not argue for or benefit from any offset or reduction of
any award of compensatory damages as a consequence of its payment of the civil penalty
to the SEC.
While the SEC’s action stands alone as an important
enforcement matter, it portends a welcome and broader effort by U.S. Regulators
to aggressively pursue all those who are responsible for the mushrooming number
of massive schemes to defraud that are devastating untold numbers of investors.
