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July 29, 2010 |
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| March 08, 2010 |
By: Vanessa Blum |
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o risk. Guaranteed profits. Secret settlements.
By now, South Florida knows how fraudster Scott Rothstein fleeced investors out of $1.2 billion by purporting to sell them shares of confidential out-of-court legal settlements reached by his Fort Lauderdale law firm Rothstein Rosenfeldt Adler.
DBR TV: Structured settlement industry trying to distance itself from Rothstein
The investments were phony because the settlements never existed. In the tradition of swindlers from time immemorial, Rothstein was peddling snake oil, swampland, a fiction.
Still, the massive con has drawn attention to structured settlements and other real-world investment vehicles that share features found in Rothstein’s scam. He invented settlements and offered investors a chance to get involved by turning lump-sum awards into interest-bearing installment payments.
Rothstein’s offerings resembled legitimate structured settlements, but it turned out they weren’t. Investigators initially referred to his vehicle as structured settlements but quietly backed off. The structured settlement industry has been wrestling with a public relations problem ever since.
Dallas-area attorney Earl Nesbitt, executive director of the National Association of Settlement Purchasers, said the Rothstein blowup “immediately caused consternation.”
“Any time an industry as small as ours has a hint of scandal, that could have a tremendously deleterious impact,” said Nesbitt, a partner with Nesbitt Vassar McCown & Roden in Addison, Texas. “The good news is in fact it didn’t really involve structured settlements. It was simply a scheme that had nothing to do with the legitimate industry.”
Rothstein pleaded guilty in January to five felonies including racketeering conspiracy, money-laundering conspiracy, fraud conspiracy and two counts of wire fraud. He faces up to 100 years in prison at sentencing set for May 6.
Nesbitt said the returns offered by Rothstein — more than 20 percent in 90 days in some cases — would be unheard of in a structured settlement investment.
“That just doesn’t happen,” he said.
Scott Topolski, a partner in the Boca Raton office of Buckingham Doolittle & Burroughs, represents firms that purchase future payment streams under structured settlements.
He said structured settlements are regulated by state and federal law. Contrary to the bogus investment opportunity in the Rothstein scam, structured settlement payments cannot be resold or transferred without court approval.
“From my perspective, this has nothing to do with the structured settlement industry,” Topolski said. “It’s unfortunate if there’s a black eye as a result.”
Selling Settlements
Structured settlements are often used to resolve personal injury cases. Rather than paying a lump sum, a structured settlement is distributed over time, which offers benefits on both sides.
Payments are typically funded by a life insurance annuity, setting up a payment stream intended to cover medical expenses over a lifetime.
An investment opportunity arises when a litigant opts to cash out early and sell future payments at a discount, also known as factoring. This secondary market is worth roughly $300 million annually, Nesbitt said.
Plaintiff attorney Stuart Grossman of Miami’s Grossman Roth is a big proponent of structured settlements. He said he uses structures in 85 percent of his cases and always presents the option to clients.
If the Rothstein scandal made lawyers turn away from structured settlements, that would be a “terrible consequence,” Grossman said.
“For a lawyer not to give a client an option to accept a lump sum or to have something put in place to pay over time is malpractice,” he said. “Every client should have the right to make that decision.”
Michael Goodman, a consultant with National Settlement Consultants in Boca Raton, agrees.
About 90 percent of litigants who take a lump sum settlement blow through the money in less than five years, he said. One third will spend the money in two months “no different than an athlete or a lottery winner.”
There are other advantages as well: distributions are exempt from income tax and don’t interfere with eligibility for government programs like Medicaid, he said.
Goodman said he almost always tries to dissuade litigants from selling their settlement payments to third parties. But there are exceptions.
He recalled a widow placed in a structured settlement to begin paying out in her retirement years. Five years later, the woman was diagnosed with lung cancer and needed money for her medical bills. The only thing she had left was her structured settlement, Goodman said.
Not so Structured
Before the Rothstein scandal, few people outside the legal industry had heard of structured settlements. But as Rothstein’s fraud came to light, the label became shorthand for the complicated business arrangements he used to part investors from their cash.
Rothstein presented investors with an opportunity to purchase confidential settlements of sexual harassment and whistle-blower claims that had not produced lawsuits, a format that made due diligence impossible. In exchange for paying individual plaintiffs a lump sum, investors would receive the full settlement amount over a period of months for a return of at least 20 percent.
“All of the confidential settlements were purely fabricated,” according to federal prosecutors.
Attorney Kendall Coffey, hired by Rothstein’s law partner Stuart Rosenfeldt to sue Rothstein, first described Rothstein’s side business as dealing in structured settlements. Later, the FBI issued a news release urging victims to come forward with information on “the Rothstein structured settlement investment.”
Peter Arnold, a spokesman for the National Structured Settlements Trade Association, has been trying to correct the record ever since.
“What Scott Rothstein sold or pretended to sell could not have been a structured settlement,” he said.
First, under federal tax laws, structured settlements can be reached only in cases involving personal injury, workers compensation and wrongful death. Rothstein’s purported settlements in sexual harassment and whistle-blower cases would not qualify for the same tax treatment, Arnold said.
Second, structured settlements must be funded by either a life insurance annuity or a government bond, while Rothstein claimed the full settlement amount had been deposited in his law firm’s trust account.
A copy of Rothstein’s business plan provided to the trade group last April explicitly stated the investments did “not qualify as structured settlements.”
NSSTA Code of Conduct
It was a necessary distinction for Rothstein to make because legitimate transactions involving structured settlements must be approved by a judge, according to Arnold.
Florida law states structured settlement rights may not be transferred without authorization “by a court of competent jurisdiction.” To secure court approval, investment firms must disclose how deeply the settlement has been discounted and convince a judge the transaction is in the best interests of the plaintiff.
Arnold said the trade group began lobbying for court oversight about 10 years ago and helped draft a model bill, which has been adopted in some version by 47 states. Before the regulatory push, firms purchased settlements for 40 to 50 cents on the dollar, lawyers said. Now, the discount is far less.
Competition among firms and transparency keeps abuses at bay, Topolski said.
“At the end of the day, if a judge believes the statute hasn’t been complied with the judge has a duty to deny the petition,” he said.
Valid Financing
Some lawyers for the structured settlement industry say Rothstein’s phony investments should be classified as litigation financing, where plaintiffs sell their future reward. The area, which is largely unregulated, offers higher rates of return because investors assume all the risk and stand to lose their entire investment if a plaintiff loses. Even on a successful claim, it can take years to collect.
Miami attorney Jay Solowsky of Solowsky & Allen was one of the lead attorneys for thousands of former Exxon gas station operators who sued the oil giant alleging they had been overcharged for fuel. After more than a decade of litigation, the class action resulted in a $1.1 billion judgment in 2005. Some class members struck deals with financiers to receive advance payments. Solowsky said class lawyers did not get directly involved in negotiations but tried to steer individuals who inquired to reputable firms.
A legitimate company might spend tens of thousands of dollars investigating the case and determining its likelihood of success, Solowsky said. Bethesda, Md.-based Stone Street Capital, which purchased more than $10 million in claims from Exxon dealers, hired two attorneys from the national law firm WilmerHale to evaluate risk.
David Lewis, Stone Street’s vice president and general counsel, said the advance payments worked out well for dozens of dealers.
“We were going in and making real cash advances to people and taking real economic risk,” he said. “We satisfied a need for people who needed money and had been waiting all these years.”
Solowsky said he was comfortable with the role of investors in the Exxon matter.
“Bottom feeders try to sell a party on taking a whole lot less money,” he said. “All the better financing firms will show you exactly where they compute their return. Then you can make a rational decision.”
Too Many Hats
The Florida Bar prohibits attorneys from directly lending money to their clients. A lawyer may provide a client with factual information about companies that offer litigation financing “if it is in the client’s interests.” With consent, an attorney may provide factual case information to a funding company.
Rothstein told investors he had no financial stake in the settlement investments even as he acted as a middleman. He used his law firm to give the scam the imprimatur of legitimacy and claimed many of the supposed confidential settlements had been negotiated for firm clients.
To Solowsky and other litigators, that’s troubling.
“He represents one group of people wearing one hat as a lawyer and then wears another hat with investors. I think he had tremendous conflict issues,” Solowsky said.
Had the purported plaintiffs been real, Rothstein’s dual role would have been a clear conflict of interest, said Andrew Hall, a commercial litigator at Miami’s Hall Lamb and Hall.
“Rothstein is plaintiff’s counsel, the attorney for these people, and what he’s doing is selling them out for a really low figure,” Hall said. “That’s a real red flag.”
For those familiar with structured settlements, the red flags were everywhere.
“The information wasn’t flowing correctly. A structured settlement transaction is completely transparent,” Nesbitt said. “Anybody who had a general knowledge of investing in structured settlements would know they are done in court completely transparently, and those kinds of returns don’t make any sense.”
Reader's comments
David P. Slater, esq. said:Insurance carriers offer structured settlements because the payout premium is less than an up front lump sum payment. Plaintiffs attorneys like them because their fee is usually paid up front and a sure settlement is easier than a trial. The pros and cons should be discussed with the client, but except for an emergency, the lump sum makes more financial sense. March 8 at 11:33 a.m. |
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