The SEC and the Office of the Comptroller of the Currency both claimed that TD Bank assisted Scott Rothstein—the Florida lawyer currently serving 50 years in prison for a Ponzi scheme—with committing fraud. The OCC contended that TD Bank violated the Bank Secrecy Act by failing to file suspicious activity reports (SARs) related to activity in the accounts held by Mr. Rothstein’s law firm.
In late September 2013, TD Bank settled with the SEC for $15 million. In old school fashion, it neither admitted nor denied liability. TD Bank also consented to an order for a civil money penalty by the OCC of $37.5 million. An investor group also sued TD Bank civilly for its participation in the fraud and won a $67 million verdict.
(In case you actually read this post because of the title, the “TD” stands for “Toronto Dominion.” It’s a Canadian bank, headquartered in Toronto.)
SEC Charges Against Frank Spinosa
TD Bank settled but its regional Vice President Frank Spinosa was recently sued by the SEC in Florida. The SEC charged him with violations of Sections 17(a)(1)-(3), Section 10(b) and Rule 10b-5 and aiding and abetting violations of Section 10(b) and Rule 10b-5.
What did Mr. Spinosa supposedly do?
The Supposed Scheme
Mr. Rothstein pleaded guilty to his participation in a $1.2 billion Ponzi scheme. During teh scheme, he would convince individuals or groups to invest in fake discounted settlements. He would tell investors that the plaintiffs in those settlements (from sexual harassment or whistleblower lawsuits) were willing to assign their interest in periodic payments in those large settlements for an up-front lump sum payment. The investor would then be entitled to the payments over time. For example, Mr. Rothstein sold one individual a $450,000 settlement to be paid out in three $150,000 payments for a lump-sum payment of $375,000.
The scheme was effected using promissory notes, which is how the SEC has jurisdiction over it at all. A promissory note is not always a “note” for the purposes of the securities law, but there does not appear to be any dispute here over that requirement.
Mr. Rothstein used TD Bank as part of his scheme. He opened 22 attorney trust accounts there as well as four operating accounts for his law firm. These were the accounts where he supposedly received money from settling defendants and paid investors.
The scheme collapsed in October 2009. Mr. Rothstein surrendered to authorities, pleaded guilty and was sentenced to 50 years in prison. Along the way, he cooperated with the government to try to reduce his sentence—and he named names.
Mr. Spinosa’s Alleged Participation
The SEC complaint does not explain how Mr. Rothstein and Mr. Spinosa met or how Mr. Spinosa came to allegedly work with Mr. Rothstein. But it does tell a fairly compelling story of how Mr. Spinosa apparently assisted Mr. Rothstein.
Because investors could not independently confirm how much money was in a TD Bank account, they relied on representations from Mr. Rothstein and Mr. Spinosa. According to the SEC, the two men used several methods to deceive investors.
The description below is based on the SEC’s allegations in its complaint. These allegations have not yet been proven and should not be taken as fact.
First, Mr. Spinosa would prepare what he called “lock letters” for investors. The letters stated that TD Bank had “irrevocably restrict[ed]” the trust accounts for the investors. According to the letters, the funds “shall only be distributed to [the investor]” at the investor’s designated bank account.
Mr. Rothstein would send the language for the letters to Mr. Spinosa who would prepare them on bank letterhead and sign them. Mr. Spinosa allegedly executed over 15 such letters during the scheme.
According to the SEC, Mr. Spinosa knew these letters were false. Mr. Rothstein could transfer funds without restriction through his internet access to the accounts.
Second, in at least one conversation with an investor, Mr. Spinosa supposedly affirmed the effectiveness of the lock letters. He also falsely told investors that lock letters were commonplace at TD Bank, when they were not.
Third, the SEC alleges that Mr. Spinosa provided false account balances to investors. In one circumstance, he told an investor the balance of the account was $22 million; it was no more than $100. He allegedly told another investor that the account held $20 million; it held zero.
What Did Mr. Spinosa Get?
Noticeably absent from the SEC’s complaint is any allegation that Mr. Spinosa received any benefit from his purposed participation in the scheme. A BusinessWeek article last year, however, reported that Mr. Rothstein paid Mr. Spinosa tens of thousands of dollars for his assistance:
Rothstein recounted rewarding Spinosa with a large envelope, containing $50,000 to $75,000 cash, that he slid across a table at lunch: “I said, ‘Keep doing the right thing by us, many thanks.’?”
If the SEC has the documents and witnesses to back up its allegations, this will be a tough case for Mr. Spinosa’s lawyers to defeat. Unlike some more complicated cases—where there is gray area about accounting questions or whether complex financial products fall under the SEC’s jurisdiction—these claims are straightforward. Any jury would understand them. If I were a betting person, I would wager that Mr. Spinosa will settle the charges at some point.
What remains to be seen is whether DOJ is gearing up to charge him criminally as well. Certainly this conduct could fit wire fraud (for the phone calls) and mail fraud (for the lock letters). That may be where the real battle is fought.