Federal Corner: You Deposited What Into Our Law Firm’s Accounts? – By F. R. Buck Files Jr.


Scott Rothstein was a successful lawyer who became the Chairman and CEO of Rothstein, Rosenfeldt and Adler, P.A. (RRA)—a Florida law firm with 70 lawyers. But that’s not the story.

Rothstein was charged in a five-count Information that alleged violations of the RICO statute: 18 U.S.C. § 1962(c). The charges were based on a common allegation that Rothstein operated a “Ponzi” scheme by

fraudulently inducing investors through the use of false statements, documents, and computer records to (1) loan money to purported borrowers based upon fraudulent promissory notes and fictitious bridge loans, and (2) invest funds based upon anticipated pay-outs from purported confidential settlement agreements which had been reached between and among certain individuals and business entities. These settlement agreements were falsely presented as having been reached between putative plaintiffs in civil cases and putative defendants based upon the forbearance of civil claims in sexual harassment and/or whistle-blower cases.

But that’s not the story.

Rothstein was sentenced to two concurrent prison terms of 50 years. But that’s not the story.

Here’s the story: Rothstein deposited the funds received from the victims of his “Ponzi” schemes into two RRA bank accounts—and the Government sought to forfeit these funds. In his plea agreement, Rothstein agreed to forfeit to the United States “all of his right, title and interest to all assets listed in the Information”—and that included the two bank accounts.

At the plea hearing, Judge Cohn entered a preliminary order of forfeiture that included these bank accounts. At the sentencing hearing, Judge Cohn entered a final order of forfeiture.

So was the Government successful in upholding the forfeiture of RRA’s bank accounts? Here’s the rest of the story:

Before charges were filed against Rothstein, four creditors of Rothstein, Rosenfeldt and Adler petitioned the Bankruptcy Court for the Southern District of Florida for a reorganization of the law firm under Chapter 11 of the United States Bankruptcy Code. Herbert Stettin was appointed to serve as Trustee of the bankruptcy estate.

Prior to Rothstein’s sentencing hearing, the Trustee petitioned Judge Cohn for an order directing the Government to return the funds seized from the law firm’s accounts. The Government moved to dismiss the Trustee’s petition, arguing, in effect, that the preliminary order of forfeiture forfeited to the United States the funds RRA held in the bank accounts. Judge Cohn denied the Trustee’s motion.

The Trustee appealed Judge Cohn’s denial of his petition, arguing that the bank accounts and the properties listed in the Information that were purchased from those accounts constituted assets of the bankruptcy estate.

On June 12, 2013, a panel of the United States Court of Appeals for the Eleventh Circuit held that as a matter of first impression, funds from investors in a “Ponzi” scheme which were deposited in a law firm’s bank accounts and commingled with legitimate income that the firm received were not “traceable to” the attorney’s scheme so as to be subject to forfeiture. In re Rothstein, Rosenfeldt, Adler, P.A., a.k.a. RRA, Debtors United States of America, Plaintiff-Appellee, v. Scott W. Rothstein, Defendant-Appellee, et.al. ___F.3d___, 2013 WL 2494980 (11th Cir. 2013) [Panel: Circuit Judges Tjoflat, Martin and Graves. Opinion by Judge Tjoflat.]

Judge Tjoflat’s opinion includes, in part, the following:

[The Trustee’s Theory of the Case]

The Trustee contends, in essence, that the bank accounts could not be forfeited because the funds they held did not constitute proceeds of Rothstein’s Ponzi scheme. Further, in his responsive briefing to our questions at oral argument, he contends that the RRA bank accounts contained commingled assets and thus were not subject to proceeds forfeiture.

[The Government’s Theory of the Case]

While the plea agreement and preliminary order of forfeiture both equivocate on the point, it seems to us from the surrounding documents that, in seeking the forfeiture of the law firm’s bank accounts, the Government proceeded under the theory that the accounts comprised the proceeds of Rothstein’s Ponzi scheme. We have said that proceeds of crime constitute a defendant’s “interest” in property, United States v. Conner, 752 F.2d 566, 575–76 (11th Cir.1985); for this reason, they can be forfeited in an in personam proceeding in a criminal case.

[What Money Can Be Forfeited]

Though RICO does not define “proceeds,” see 18 U.S.C. § 1961, the only other statutory provision that the Government has cited that makes reference to proceeds forfeiture, 18 U.S.C. § 981(a)(1)(C), defines it as “property of any kind obtained directly or indirectly, as the result of the commission of the offense giving rise to forfeiture, and any property traceable thereto, and . . . not limited to the net gain or profit realized from the offense,” 18 U.S.C. § 981(a)(2)(A). Therefore, whatever money Rothstein obtained as a result of his criminal activity, and any property that can be traced to that money, is forfeitable. Under the relation-back rule, where such money or property is “subsequently transferred to a person other than the defendant,” that money or property “vests in the United States upon the commission of the act giving rise to forfeiture” unless the third party can demonstrate his right to the property in an § 853(n) hearing. 21 U.S.C. § 853(c).

[The Requirement of a Nexus]

Property can only be forfeited as proceeds, however, where the Government “establishe[s] the requisite nexus between the property and the offense.” Fed.R.Crim.P. 32.2(b)(1)(A). The Advisory Committee notes to Federal Rule of Criminal Procedure 32.2 offer the money on deposit in a bank account as one example of “specific property” that requires such a showing:

To the extent that the government is seeking forfeiture of a particular asset, such as the money on deposit in a particular bank account that is alleged to be the proceeds of a criminal offense, or a parcel of land that is traceable to that offense, the court must find that the government has established the requisite nexus between the property and the offense.

Fed.R.Crim.P. 32.2(b) advisory committee’s note, 2000 adoption. Where no such showing can be made, the Government must resort to the substitute asset provision of sections 1963 and 853, which provides that “the court shall order the forfeiture of any other property of the defendant” where “as a result of any act or omission of the defendant,” forfeitable property, such as proceeds, “has been commingled with other property which cannot be divided without difficulty.” 21 U.S.C. § 853(p). The Government may seek forfeiture under this provision of property “up to the value” of commingled property. Id.

[The Problem of Commingling]

We have not previously addressed the question of when property becomes so commingled that it may not be forfeited directly such that substitute property must be forfeited instead. The Third Circuit, however, has offered instructive guidance in a pair of cases, United States v. Voigt, 89 F.3d 1050 (3d Cir.1996), and United States v. Stewart, 185 F.3d 112 (3d Cir.1999). In Voigt, that court held that “the government must prove by a preponderance of the evidence that the property it seeks under § 982(a)(1) in satisfaction of the amount of criminal forfeiture to which it is entitled has some nexus to the property ‘involved in’ the money laundering offense.” Id. at 1087. Commenting that this burden may be very difficult to meet where property “is commingled in an account with untainted property,” the court rejected the government’s effort to forfeit items of jewelry “purchased with funds from an account into which money laundering proceeds had been commingled with other funds, and after numerous intervening deposits and withdrawals.” Id. at 1087–88. The court held that, in such a situation, funds cannot be traced as a matter of law, and therefore “the government must satisfy its forfeiture judgment through the substitute asset provision.” Id. at 1088 (emphasis added).


[The Commingling in This Case]

In the case at hand, Rothstein’s investors’ funds were deposited in RRA bank accounts and commingled with legitimate income RRA received from the billings of its seventy lawyers, $12 million in the first ten months of 2009 alone. This commingling went on for four years—the duration of Rothstein’s Ponzi scheme. The sheer volume of financial information available and required to separate tainted from untainted monies in this case leads us to the conclusion that it is . . . appropriate to apply the Third Circuit’s rule in Voigt.


[Judge Cohn’s Frustration]

The District Court itself expressed frustration with the tracing methodology the parties employed at the ancillary hearing, which focused on the timing of deposits and withdrawals. The methodology, borrowed from the law of trusts and referred to as the lowest intermediate balance rule (“LIBR”), attempts to divide tainted and untainted money by considering, where a set amount of proceeds is deposited into an account and commingled with other funds, “the account to be ‘traceable proceeds’ to the extent of [the deposited proceeds] as long as the account balance never falls below that sum.” United States v. Banco Cafetero Panama, 797 F.2d 1154, 1159 (2d Cir.1986). The court dubbed the LIBR a “legal fiction,” Record, vol. 13, no. 579, at 12, but acknowledged that, according to the Government’s representation in open court, “all of the interested parties believe LIBR provides the appropriate legal rule here,” id. at 13 n. 8. The Court therefore “honor[ed] the parties’ accord.” Id. at 13 n. 8.

[The Court’s Conclusion]

In sum, if ever there was a case where commingled proceeds “c[ould not] be divided without difficulty” and that therefore required the Government to seek forfeiture pursuant to the statutes’ substitute property provisions, §§ 1963(m) and 853(p), this is that case. For us to conclude otherwise would “render the substitute asset provision a nullity,” Voigt, 89 F.3d at 1087, contrary to the time-honored canon of construction that we “should disfavor interpretations of statutes that render language superfluous,” In re Griffith, 206 F.3d 1389, 1393 (11th Cir.2000) (quoting Connecticut Nat’l Bank v. Germain, 503 U.S. 249, 253, 112 S.Ct. 1146, 1149, 117 L.Ed.2d 391 (1992)). We therefore hold that the District Court erred in ordering forfeiture of the funds as proceeds. Consequently, all proceedings the court held subsequent to the imposition of Rothstein’s sentence must be vacated.

My Thoughts

  • Rothstein obviously retires the trophy for being the worst law partner anyone can have.
  • This is, though, one of those cases that reminds us of a truth that we should not forget: Just because the Government wants to do it and just because the Government wins in the District Court does not mean that they will always prevail. Here we had a Trustee who took on the Government and won. Was he an underdog? Of course he was. And so are we in almost every case, but that doesn’t keep us from doing the best we can for our clients.
F. R. Buck Files, Jr.
F. R. Buck Files, Jr.
Buck Files is a charter member and former director of the Texas Criminal Defense Lawyers Association. He is a member of TDCLA’s Hall of Fame and a former President of the State Bar of Texas. In May, 2016, TDCLA’s Board of Directors named Buck as the author transcendent of the Texas Criminal Defense Lawyers Association. He practices in Tyler with the law firm of Files Harrison, P.C., and can be reached at or (903) 595-3573.

Buck Files is a charter member and former director of the Texas Criminal Defense Lawyers Association. He is a member of TDCLA’s Hall of Fame and a former President of the State Bar of Texas. In May, 2016, TDCLA’s Board of Directors named Buck as the author transcendent of the Texas Criminal Defense Lawyers Association. He practices in Tyler with the law firm of Files Harrison, P.C., and can be reached at or (903) 595-3573.

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