Prosecutors Go After Bankruptcy Attorneys – and Their Fees – in Wrap-Up of Crookedest Lawyer’s Firm

New York Lawyer | July 2, 2010 By John Pacenti | MIAMI – With federal prosecutors grabbing for most of the assets left over from Scott Rothstein’s massive Ponzi scheme, it remains to be seen whether attorneys involved in his former firm’s bankruptcy will reap the millions of dollars in fees originally expected from the case.

Federal prosecutors are trying to muscle the bankruptcy attorneys out, and so far they’ve succeeded. The government holds that it can get more money to the victims of Rothstein’s $1.2 billion fraud faster than those administering the remains of Rothstein Rosenfeldt Adler – without generating the millions of dollars in fees associated with bankruptcy cases.

U.S. District Judge James I. Cohn, who sent Rothstein to prison for 50 years, has sided with the government on the few financial decisions he’s made, at one point ordering court-appointed bankruptcy trustee Herbert Stettin to turn over $1.6 million in four bank accounts used by Rothstein to perpetrate his scheme.

But whether Uncle Sam or Uncle Stettin will distribute the bulk of the recovered money is still a question before Cohn, who said he wants restitution to the fraud victims completed by Aug. 30.

Attorneys in the contentious case surrounding Rothstein’s defunct firm say the federal government’s insistence on distributing what’s left won’t affect the payment of legal fees and expenses.

„The litigation in respect of forfeiture matters is far from over,“ said attorney Paul Singerman of Berger Singerman, who represents Stettin. Assets claimed by Stettin „in the forfeiture case should not be subject to forfeiture and should instead be administered in the Chapter 11 bankruptcy case.“

Michael Goldberg, an Akerman Senterfitt shareholder representing the creditors‘ committee in Bankruptcy Court, sees a single goal no matter who is in charge of financial administration.

„The battle right now between the government and the estate is really who is the best to administer the assets so that – either way it goes – those creditors with clean hands should be able to share in the assets,“ he said.

A Host of Defendants

The firm’s collapse has generated a cottage industry, spawning a number of lawsuits – one having more than 1,000 pages thick – against a host of defendants who brushed up against Rothstein during his four-year reign of excess.

As a result, a number of South Florida bankruptcy attorneys are connected in some way to the actions in federal and state courts. Most refused to comment for attribution. But they told the Daily Business Review the government doesn’t want money that can go to victims ending up in the pockets of attorneys who see the Rothstein case as a cash cow for them.

It’s not unusual for large frauds to generate big fees for lawyers. One example is the Lancer Management Group, a Connecticut hedge fund taken over by the Securities and Exchange Commission in 2003. The receiver who took over Lancer – Miami attorney Marty Steinberg – has generated upwards of $40 million in professional fees and costs for his firm, Hunton & Williams, and others.

Steinberg’s attorney in the Lancer case, Craig Rasile, also of Hunton & Williams, was the second top earner in a Daily Business Review survey last October of lawyer compensation, making a top wage of $735 an hour.

The U.S. attorney’s office has been quite clear that it wants to avoid mounting professional fees by taking the assignment to distribute most of the money left over in the wake of Rothstein’s monumental collapse. Assistant U.S. Attorney Alison Lehr told Cohn in a March 5 motion, „The bankruptcy trustee’s fees and costs will have a significant impact on victim recoveries.“

She pointed to $2.2 million in fees approved for work from Nov. 10 to March 4. Attorneys at Berger Singerman and Genovese Joblove & Battista received $1.5 million in fees and $32,000 in expenses, while an accountant received $611,000 in fees and $1,800 in expenses. The law and accounting firms have agreed to a temporary holdback of 35 percent to 65 percent of their fees until more money is recovered by the trustee.

Lehr, reached by telephone, said she could not comment on the pending matter.

The fees would not be considered excessive given the size of the fraud and intensity of the early work in the case after the scheme collapsed last Halloween weekend. But prosecutors are focused on repayment. „Needless to say, such fees and expenses heavily impact creditor/victim recovery,“ Lehr wrote.

Thomas Tew, a partner at Tew Cardenas in Miami, took some flak from Singerman in March for saying there could be scant money left over for fees and expenses once the dust settles.

But Tew, who represents Gibraltar Private Bank & Trust in a Rothstein-related civil suit, said he was sympathetic to the position in which Stettin and Singerman find themselves.

„The receiver and the counsel are faced with a dilemma. They have duties, and to fulfill those duties takes time and money,“ Tew said. „But to fulfill those duties, they have to spend money. It’s a Catch-22 for them.“

Prosecutors Unconvinced

Singerman said prosecutors are not convinced the track in Bankruptcy Court is the way to go in the Rothstein case.

„Despite that we were willing to provide the government all reasonable assurances regarding the fees and costs of professionals in the bankruptcy case, and our unqualified statements in that regard, in pleadings filed in both the district court and the Bankruptcy Court, we have apparently failed to give the government sufficient comfort,“ he conceded.

The question is if this is a sea change in major fraud cases or unique to Rothstein.

Bankruptcy attorneys in the case say they are supposed to chase the assets while prosecutors focus on the bad guys. But the FBI began digging into the law firm’s computer records within days, and agents and bankruptcy counsel have been working on parallel tracks.

Charles Intriago, president of International Association for Asset Recovery, said the government can get the money to the people who deserve it cheaper and more efficiently than a receiver or trustee.

„Receivers get paid the corpus of what is recovered,“ he said. „Attorneys for the Department of Justice are paid from publicly appropriated funds. It’s the Justice Department’s feeling that when they are able to do the work, more of the money can be distributed to the victims of fraud.“

For Singerman, he’s heard all this criticism before in his long career.

He said there is a reason Bankruptcy Court generally handles distribution of money and reconciliation of claims – whether it be in cases due to fraud or financial collapse.

Congress has crafted a distribution plan in bankruptcy cases under which creditors are ranked in order of importance so the most deserving get most of the money. Trustees also have the power to file recovery lawsuits, as Stettin has numerous times in the Rothstein case, to retrieve money owed to the estate.

So-called clawback lawsuits can target investors who may have gotten money out before the Ponzi collapsed. For now, Singerman’s firm has focused most of its lawsuits on former RRA attorneys who benefited from loans and other forms of extra compensation.

But Singerman said intensive settlement negotiations are under way with a number of non-RRA litigation targets.

Banyon Investments, which operated out of the law firm, poses a thorny problem. It claims in Bankruptcy Court that it lost $775 million in Rothstein’s fake settlement financing scheme, but civil suits claim the company lured investors into Rothstein’s scheme.

If the government doesn’t distinguish between clean and unclean hands when distributing recovered money, it could end up paying Banyon only to force Stettin to sue for the money back. Singerman fears that very scenario. „If the government ultimately wins out, it may put the estate in the bizarre position of having to sue the very same people the government is giving money to in order for the estate to recover clawbacks,“ he said.

Escrow Accounts Raided

Singerman also said former RRA clients whose escrow accounts were raided by Rothstein would not get paid in the criminal case. Prosecutors have said they are sympathetic to these third parties, but they lack standing in its forfeiture action.

Goldberg last week filed opposition to the government’s plan, spelling out why it’s important to rank creditors, which is done in bankruptcy court but not in criminal court.

Even if the government ends up doing the heavy lifting on distributions, attorneys working on the bankruptcy case will be paid, he said.

„The estate is most likely to collect more than enough money to pay the bankruptcy professional fees from other sources so that it wouldn’t have to dip into the government’s pot of money,“ Goldberg said. „I know people have accused the trustee and everybody of doing this solely to be paid, but that couldn’t be further from the truth.“

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