It is astonishing how much things can change; Scott Rothstein was king of his little Florida domain not even 3 months ago. A prominent Florida Attorney, Scott was recently charged with 2 counts of committing wire fraud, along with 3 counts of conspiracy. According to estimates, he conducted a $1.2 Billion Ponzi scheme - which places it up with some of the years largest.
It seems that bad economic times bring out a whole host of disasters. First it was Madoff, then Stanford, now Rothstein; no one seemed to care when the Dow was at 14,000, while banks were leveraged to the hilt. Yet, now that money is tighter people have started look at records much more closely.
The initial question by most of main street was how did a lawyer, not even an investment manager, proceed to take anywhere from $500 Million to $1.2 Billion from “investors”. Rothstein as the co-founder of the law firm Rothstein Rosenfeldt Adler PA specialized in very confidential cases; many of which related to either sexual harassment or “whistleblowers”. While he was able to act as the prosecutor on a large majority of these high profile cases, Scott soon began to over exaggerate how many he was actually closing. Also, initially at first he needed investors who could spot the plaintiff the initial settlement, if they wanted it up front. If the plaintiff chose this option they would receive a smaller portion of the awarded settlement. Yet, the investors instead would wait for the full payment from the defendants, and as a result benefited from the spread.
As time progressed, Rothstein saw that he could essentially get short term loans for whatever his intentions were, without having to even explain where the money was being appropriated. Cases were of the utmost confidentiality, so all investors were allowed to know was, a promise of a future returns. All records were kept within the firm’s main office with the only key belonging to Rothstein. Prosecutors denoted that the beginning of the Ponzi schemed began in 2005 and escalated extremely rapidly. At first Rothstein allegedly use the funds to invest in the then rising real estate market and over a period of several years purchased 22 properties. The most expensive of these, located in Harbor Beach, Florida, reportedly cost a total of $6.45 million.
While not misappropriating funds in real estate, Rothstein also lived a very luxurious lifestyle. He owned a collection of Italian sports cars and countless personal possessions that amount to a cost in the tens of millions. Not only was he investing client’s money but by 2008 he had to look to find new investors just to keep his law firm running. Recent disclosed documents have shown an expense to revenue ratio of nearly 2:1, while at the same time he was managing to donate millions of alleged profits to charities and political campaigns. On top of paying for a host of body guards, he spent as if the money would continue to come in forever.
His illegal practices worked until eventually he ran out of fresh investors, from which he could pay back the older. And after one investor did not receive his money back on the promised date, the fraud was unraveled. Rothstein’s firm sued him under claims that he was running an illegal side business in November, amidst an ongoing investigation. And on December 2nd he was formally charged along with be being debarred within Florida. The full losses of his fraud has yet to come out but at the same time Rothstein is most likely not last instance we shall here before the economy improves.
Things have really changed since 3 months ago, he according to a columnist from a Miami newspaper described himself as the “Jewish Avenger”. Infuriated over a column about a politician he supported, he verbally threatened the man’s family and career. His power must have seemed unlimited and now he must see that he really has none at all.
