No RICO Case in Bank’s Ponzi Schemer Dealings

(CN) - TD Bank will not have to face claims that it violated anti-racketeering law arising from a $1.2 billion Ponzi scheme orchestrated by now-disbarred Florida attorney Scott Rothstein, a federal judge ruled, though a jury will have to sort out the other allegations.

Between 2005 and 2009, Rothstein ran a massive investment scam from his South Florida law office, inducing investors to buy fictitious structured settlements from purported high-profile big-money lawsuits.

Rothstein is currently serving a 50-year sentence after pleading guilty to a host of crimes, including conspiracy to commit RICO violations and money laundering.

Coquina Investments, a Texas investment partnership, claimed to be one of Rothstein's victims, with more than $37 million invested in the scheme. The investment group alleged that TD Bank, where Rothstein held several bank accounts containing "criminally derived proceeds from the Ponzi scheme," actively participated in the investment fraud through its former regional vice president and other employees.

Vice President Frank Spinosa allegedly signed fraudulent and misleading documents, including "lock letters" that stated that funds in trust accounts would be distributed only to specific investors.

The complaint alleged that, from December 2008 through October 2009, TD Bank generated 21 fraud alerts in connection with Rothstein's accounts, but the bank ignored the alerts or failed to properly investigate them.

Coquina sued TD Bank for RICO violations, conspiracy to commit RICO violations, fraudulent misrepresentation, and aiding and abetting fraud.

TD Bank, however, claimed that its officials knew nothing about Rothstein's fraud. What's more, the bank argued that Rothstein and his associates forged Spinosa's signature on several letters on TD Bank's letterhead, created fake TD Bank websites and account statements, and posed as TD Bank officials.

Though Rothstein and his associates met with investors at TD Bank's offices, the bank said any of its customers can use the bank's conference rooms. Rothstein also set up a TD Bank account for Coquina's investments, but the bank claimed that it had neither introduced Coquina to Rothstein's investments nor mediated their meetings.

U.S. District Judge Marcia Cooke in Miami allowed Coquina to pursue its RICO claims against TD Bank in January, but this month she concluded that "there is insufficient evidence to establish that TD Bank conducted or participated in the conduct of an enterprise, or engaged in a pattern of racketeering activity."

Coquina failed to substantiate claims that TD Bank was responsible for its employees' actions, Cooke ruled, noting the lack of an apparent benefit to the bank.

"Coquina has presented evidence that a large amount of money passed through the RRA/Rothstein accounts, and the employees at TD Bank's Weston branch considered Rothstein their biggest client," Cooke wrote. "Coquina, however, presents no evidence or arguments to show that the transfers or open accounts somehow benefited TD Bank. Coquina does state that 'TD Bank opened numerous operating and trust accounts on behalf of Rothstein and [Rothstein's firm] RRA and allowed them to stay open despite fraud alerts, overdrafts, uncollected funds, high dollar amount transfers and low monthly balances.' ... From these facts alone, however, I cannot infer that TD Bank derived some benefit from the RICO violations, such as in the form of high monthly balances that would improve the bank's cash or result in interest earnings."

If anything, uncollected funds and low balances in the Rothstein accounts hurt the bank, Cooke noted.

Coquina also failed to show that Spinosa or other bank employees directed Rothstein's operations, or that TD Bank was vital to Rothstein's scheme. And because the alleged violations were limited to a five-month period, it also failed to establish a pattern of racketeering activity, the ruling states.

In the absence of an agreement between Coquina and TD Bank to participate in the alleged racketeering activities, Coquina's conspiracy claim also fails, according to the 31-page order.

Coquina sought to amend its RICO claims, but Cooke rebuffed its attempt on Monday, finding that it was untimely and would prejudice TD Bank.

Last week, the court ruled that Coquina's fraudulent misrepresentation claim is more suitable for a jury, which could best determine if Spinosa made false representations to Coquina, for the benefit of his employer, and whether Coquina relied on his statements and was injured as a result.

Cooke also left Coquina's aiding and abetting fraud claim up to the jury, finding that it was not clear whether TD Bank's employees had knowledge of the fraud or provided substantial assistance to Rothstein.

But the judge rejected TD Bank's contention that Coquina had failed to "conduct sufficient due diligence" before investing in Rothstein's scheme, because Coquina did not have an obligation to do so before discovering the fraud.

In a separate order, Cooke agreed to exclude Spinosa's testimony, finding that Spinosa, who was fired in 2009 and "had little, if any, loyalty to TD Bank," may have interests that are not compatible with those of the bank.

Coquina, however, may use bank audit reports and policies as evidence, as well as evidence provided by other purported victims of Rothstein and TD Bank, which are yet unidentified, the order states.

Cooke allowed testimony from Mike Szafranski, the broker for Coquina's deal with Rothstein, finding it relevant to the action.

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