Scott Rothstein’s mess appears to deepen, as the largest Ponzi scheme ever attributed to a US lawyer increasingly appears to involve the law firm partners.

The wreckage of the law firm appears to have ensnared many of the partners, as the Miami Herald reports, here. The lawyers for the bankruptcy trustee, Charles Lichtman and Paul Singerman, allege that many transactions involving the partners were fraudulent and seek to recoup those amounts on behalf of the creditors and the bankruptcy estate.

Examples of alleged fraudulent activity by the partners include:

  1. The movement of firm funds over the past four years through “the systematic trading of checks with the law firm and payment of third parties with law firm funds”.
  2. $475,000 in loans to partner Russell Adler, who purchased a New York apartment with his wife, just two months before the collapse of the Ponzi scheme.
  3. Partner Stuart Rosenfeldt charged $1 million of jewelry to his firm-issued American Express card to pay for 72 pieces of jewelry for his wife, including home furnishings, clothes, vacations, restaurant meals, exotic reptiles, etc.
  4. Rosenfeldt also transferred at least $690,000 in purported loans or salary payments to his wife on 30 separate occasions.
  5. Many of the partners received hundreds of thousands of dollars in bonuses in 2008, and immediately contributed the funds to the GOP presidential nominees John McCain and Sarah Palin.
  6. Rosenfeltd and partner Steven Lippman “typically deposited their [law firm] loan checks and then quickly turned around and disbursed the money back to the firm”.
  7. Rosenfeldt also used some of his “$9 million in loans to write a check for $61,500 to Kendall Sports Bar”, in which Rothstein had in interest with club owner Stephen Caputi.
  8. The law firm loaned Lippman almost $9 million, who wrote checks to third parties, including Kendall Sports Bar, directly to Rothstein, to Banyon, the largest Rothstein investor, and to Albert Peter, a business partner of Rothstein’s.

The scope and size of these transactions should be clear badges of fraud and point to money laundering, but really suggest that the partners knew that a criminal enterprise was being conducted by Rothstein. Merely receiving millions in loans from the law firm should have tipped-off the partners that firm revenues alone could not have supported these outlays, but the disbursement of funds to Rothstein controlled entities or affiliations should have raised significant red-flags and warnings.

These warnings were more than mere badges of fraud, or red flags. They screamed fraud at every turn, and indicated that an ongoing, criminal enterprise was being hatched in their midst. The partners chose to ignore these sirens at their own peril, and should have understood that doing so would ultimately tie them to this mess, likely forever. Either way, they will likely face the wrath of federal investigators, the Florida Bar, and innocent investors, who will collectively seek vengeance and retribution from anyone associated with Rothstein in an effort to deflect attention from their own failure to perform even minimal due diligence and review of Rothstein’s operations.

Again, had they performed even minimal due diligence, and performed even basic reverse-engineering of firm revenues purportedly being generated by Rothstein, firm partners would have concluded that the firm revenue-stream was a fabrication. Mere ignorance of these facts does not exonerate firm members.  How these firm partners could have allowed this scheme to remain undetected or undisturbed is scandalous. The badges of fraud were screaming “fraud” at every turn, yet no one thought to ask obvious questions or inquire as to the source of the suspicious revenue stream.

If lawyers are incapable of making these simple yet important judgments, then perhaps they should not be entrusted with complex business decisions, critical analysis, or due-diligence.  The skills required to detect this fraud are basic and require little more than basic mathematical prowess. The Rothstein fraud was simplistic, unorganized, unsophisticated and obvious.

This fraud, along with the Marc Drier fraud, is a turning-point for the legal profession, and serves notice that it’s ignorance of crucial business processes is unacceptable. Lawyers are trusted counselors and advisors, and must have the sophistication to detect and report these frauds. What value does this profession add if it is unable to detect even the obvious?