Banyon Hedge Fund Lost $775 Million Invested With Rothstein

Date: Tuesday, December 8, 2009
Author: Carlyn Kolker, Linda Sandler and David Voreacos, Bloomberg

Banyon Investments LLC, a hedge fund in Fort Lauderdale, Florida, invested $775 million in the alleged $1.2 billion Ponzi scheme run by Scott Rothstein, bankruptcy court records show.

Banyon’s investments make it the largest creditor of Rothstein’s defunct law firm, which collapsed amid allegations he was running a Ponzi scheme, according to the list of 20 top creditors filed Dec. 2 in U.S. Bankruptcy Court in Fort Lauderdale.

Rothstein, 47, pleaded not guilty Dec. 1 to charges that he ran the alleged scheme since 2005. He sold investors stakes in fictitious legal settlements, prosecutors said.

A lawsuit against Rothstein by alleged victims names Banyon and its chief executive officer, George Levin, as defendants who knowingly participated in the scheme. Through Banyon funds, Levin invested as much as $75 million a month with Rothstein, buying more than $1.1 billion of legal settlements at a discounted $657 million even though he knew they were phony, according to the lawsuit, which was amended Nov. 25.

Banyon assets funneled to Rothstein “served as rocket fuel blasting the obscure investment vehicle to dizzying heights,” according to the lawsuit, brought by individual and institutional plaintiffs in state court in Fort Lauderdale.

Quarterly Audits

Banyon’s pitch to investors was that they were buying stakes in accounts that held payments already made from lawsuit settlements, which would be audited by a so-called Big Four firm quarterly, according to the lawsuit. It cited offering documents and testimony from one of the plaintiffs, D&L Partners of Broward County, Florida. Plaintiffs had sold their right to future payments to get money up front, the complaint said.

Levin has denied the allegations, said Jesse Derris, a spokesman. The hedge fund manager by contrast was a whistleblower, contacting the U.S. Attorney’s office on Nov. 1 to report “irregularities” after Rothstein failed to make a payment, he said.

Banyon’s goal was to buy from Rothstein “discount settlements and related periodic revenue stream from individual plaintiffs who have settled their labor and employment related lawsuits or claims and who would otherwise receive their settlement amounts over a period of time,” the complaint said.

The complaint cited an offering document for the Banyon Income Fund LP, which it said was created in May 2009 to serve as a feeder fund for Rothstein.

Previous Plea

Banyon’s chief operating officer was Frank J. Preve, who pleaded guilty in 1985 to bank embezzlement, according to the complaint. Preve was sentenced to 10 years probation and a $10,000 fine for falsifying loan documents as part of a scheme that led to losses of more than $2.3 million, according to the complaint, which names him as a defendant.

Preve wasn’t immediately available for comment yesterday, said a woman who answered the phone at Preve’s home in Carol Springs, Florida. She said she was the housekeeper.

Solicited for money, D&L’s general partner Doug Von Allmen was told that Levin was a mentor and confidant of Rothstein, with “an exclusive arrangement” to buy settlements on behalf of Banyon funds, according to the complaint. Levin was worth more than $400 million and would personally guarantee the settlements, Von Allmen was told, according to the complaint.

Levin, 69, made enough in the retail industry in Philadelphia in the 1960s to retire in Florida at age 32, the Miami Herald reported.

Timber Farm

He later invested in real estate in Florida, hotels in Atlantic City and Palm Beach, a timber farm in North Carolina, and a yacht building company in Japan, the Herald said. He also helped reorganize a bankrupt Massachusetts computer company and sold it to Oracle Corp., the newspaper reported.

Rothstein’s 70-lawyer firm, Rothstein Rosenfeldt Adler PA, collapsed in the wake of allegations that Rothstein told investors they could buy discounted stakes in settlements of sexual harassment and whistleblower lawsuits, prosecutors said. He told investors they would collect the full proceeds.

“Levin personally invested millions with Rothstein and so did his family and friends,” Derris said. “He’s one of the biggest losers from the scheme.”

Rothstein pleaded not guilty to two counts of wire fraud and three conspiracy charges. He is being held without bail and faces as much as 100 years in prison.

$147 Million Claim

In addition to Banyon’s investments, Ira Sochet Trustee has a claim for $147 million, Emess Capital LLC has a claim for $60 million and Morse Operations has a claim for $44 million, according to the Dec. 2 filing in bankruptcy court in Fort Lauderdale.

Sochet didn’t return calls seeking comment and a man who answered one of his phones in Miami at the address listed in court documents said he wasn’t in and hung up.

Emess, based in Brooklyn, isn’t listed in public telephone directories.

“Our hopes are to get the funds back. That is our basic hope,” Morse attorney Norman Tripp said yesterday in a telephone interview.

Tripp’s clients were the victims of a separate alleged fraud detailed in the criminal charges against Rothstein. He allegedly bilked the Morse family by saying they had to post a $57 million bond in order to recover a judgment he falsely said he had won on their behalf.

Bankruptcy trustee Herbert Stettin may uncover additional losses as he investigates the law firm’s records, he wrote in the bankruptcy court filing. The list of unsecured creditors was derived primarily from a review of the firm’s accounts at TD Bank, according to Stettin.

Inadequate Books

TD Bank, a unit of Toronto-Dominion Bank, was also sued by the individual and institutional investors.

“The books and records that were available are in disarray, inadequate and do not contain the typical records that one would expect to be maintained in the normal course of business,” Stettin wrote in the filing.

Separately yesterday, U.S. District Judge James Cohn in Fort Lauderdale said Rothstein can’t sell, transfer or dissipate his assets.

The bankruptcy case is In Re: Rothstein Rosenfeldt Adler, 09-34791, U.S. Bankruptcy Court, Southern District of Florida (Fort Lauderdale). The investors’ case is Razorback Funding LLC v. Rothstein, 09062943, Circuit Court, 17th Judicial Circuit, Broward County, Florida (Fort Lauderdale).

To contact the reporters responsible for this story: Carlyn Kolker in New York at ckolker@bloomberg.net; Linda Sandler in New York at lsandler@bloomberg.net; David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.