On September 23, 2013, the SEC charged TD Bank and a former executive with violating securities laws in connection with a massive South Florida-based Ponzi scheme conducted by Scott Rothstein, who is now serving a 50-year prison sentence.
The SEC alleged that TD Bank and its then-regional vice president Frank A. Spinosa defrauded investors by producing a series of misleading documents and making false statements about accounts that Rothstein held at the bank and used to perpetuate his scheme. Spinosa falsely represented to several investors that TD Bank had restricted the movement of the funds in these accounts when, in fact, Rothstein could transfer investor money however he desired. Spinosa also orally assured investors that certain accounts held balances totaling millions of dollars, but each account actually held zero to $100.
TD Bank agreed to settle the SEC’s charges in an administrative proceeding and pay $15 million. The SEC filed a complaint against Spinosa in U.S. District Court for the Southern District of Florida.
According to the SEC’s order and complaint, Rothstein claimed to represent plaintiffs who had reached purported legal settlements that were confidential and payable over time by large corporate defendants. He claimed that the purported plaintiffs were willing to sell their periodic payments to investors at a discount in exchange for one lump-sum payment. The legal settlements were fake and the plaintiffs and defendants were not real. Rothstein told investors that the purported defendants had deposited the entire settlement amounts into attorney trust accounts. Rothstein opened 22 such accounts at Commerce Bank and TD Bank (the two merged in 2008) from November 2007 to October 2009.
The SEC alleged that as Rothstein’s scheme began to unravel in the fall of 2009, Spinosa made false statements to investors about the safety of their investments that enabled Rothstein to continue raising funds for the scheme. Spinosa executed so-called “lock letters” from TD Bank purporting to irrevocably restrict Rothstein’s trust accounts. Under these conditions, TD Bank could only distribute funds in the accounts to the investor’s bank account designated in the lock letter. However, the representations were purely false as Spinosa did not apply any procedures to block the accounts or implement any system to restrict Rothstein from moving money out of the trust accounts. Spinosa also misrepresented to Rothstein’s investors that the lock letters were commonplace at TD Bank when, in fact, they were never previously used by the bank. In fact, when Spinosa instructed his assistant to prepare the letters on TD Bank letterhead, she questioned whether it was even permissible because she had never seen such a letter before. Spinosa confirmed that she should prepare the letter for his signature anyway. Later, a vice president and branch manager who reported to Spinosa noted to him shortly after the first lock letter went out in August 2009 that the “lock” instructions put onto an account would have no practical effect because Rothstein could still transfer the money without bank officials being alerted. Spinosa dismissed those concerns.
The SEC further alleged that Spinosa provided false assurances to two different groups of investors that certain trust accounts held the multi-million dollar balances claimed by Rothstein. On Aug. 17, 2009, Spinosa participated in a conference call with Rothstein and representatives of an investor group who asked how much money was in a particular account. Spinosa responded that it held $22 million – the amount the investor was expecting to hear. Spinosa had full access to the account information to know the actual account balance was no more than $100. The following month, Spinosa met with the same group after it made additional investments with Rothstein, and falsely assured the investors that their money was safe because the provisions of the lock letter restricted the movement of their money. Also in September 2009, a different investor group bought a purported $20 million settlement from Rothstein, and one of the investor group’s representatives obtained a TD Bank deposit slip that indicated a $0 balance as of that morning for the account that purportedly held the investor’s $20 million. Rothstein falsely stated that the funds were indeed in the account, but the funds would not appear “available” on the deposit slip because they were in TD Bank’s “federal wire queue.” Rothstein and representatives from the investor group met with Spinosa on Sept. 14, 2009, and Spinosa falsely represented that the $20 million did not appear as available funds for the same reason provided by Rothstein. Spinosa falsely represented that the lock letter restricted the movement of their money. In reality, TD Bank was not holding the money in such a queue, and the account didn’t contain the $20 million.
TD Bank consented to the entry of an administrative order finding that it violated Sections 17(a)(2) and (3) of the Securities Act of 1933. Without admitting or denying the SEC’s findings, TD Bank agreed to pay $15 million and cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.
The SEC’s complaint against Spinosa charged him with violating Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933 and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. Spinosa also is charged with aiding and abetting Scott Rothstein’s violations of Section 10(b) of the Exchange Act and Rule 10b-5. The complaint is seeking disgorgement plus prejudgment interest, financial penalties, and a permanent injunction.