11/18/2009

Funds in Rothstein Case Could Forfeit Gains

Hedge funds that profited from a suspected $500 million Ponzi scheme in Florida will likely have to relinquish their gains to investors who lost money in the scam.

At least three hedge funds - Centurion Credit, Clockwork Capital and Platinum Management - loaned money to investors in a Fort Lauderdale operation that claimed to finance legal-settlement payments. A lawyer who headed the operation, Scott Rothstein, is now under investigation by the U.S. Justice Department. Authorities have seized Rothstein's personal assets and his firm, Rothstein Rosenfeldt, has been turned over to a court-appointed receiver.

A bankruptcy judge is expected to be appointed on Friday. Soon after, the judge will open a 90-day window during which an estimated 375 investors can file claims to recoup their losses. Legal experts say the court will likely track down early investors that made money off the scheme - including hedge funds that helped finance the operation - and order them to give up their profits to reimburse later investors who were left holding the bag. Some hedge funds could be among the investors that lost money on the scheme and, therefore, could benefit from the clawbacks.

It's unclear how much Centurion, Clockwork and Platinum made or lost by lending money to investors in Rothstein's operation. However, Platinum has said it had nothing invested in the scheme at the time the alleged fraud was exposed earlier this month - suggesting it may have pocketed profits.

Rothstein pitched his investment scheme as a legal-settlement-financing operation that worked like this: He would make discounted lump-sum payments to plaintiffs who had won out-of-court settlements but didn't want to wait months or years to receive the full amounts. Rothstein and his investors would profit as they received the full settlement payments.

One of Rothstein's biggest investors, Banyon Funding of Las Vegas, pitched the scheme to at least 15 hedge fund operators. Managers were invited to lend money to Banyon at interest rates of 20-25%. Banyon, in turn, made profits of 300%-plus on an annualized basis.

Clockwork is the latest hedge fund operator to be tied to the scheme. Headed by Abraxas "A.J." Discala, the firm appears to have been set up for the sole purpose of lending to Banyon and making direct investments in Rothstein's operation. Clockwork invested at least $30 million overall.

Before Clockwork, Discala ran Brax Capital, a Beverly Hills firm that billed itself as a merchant bank. Brax is now out of business. Discala is the ex-husband of actress Jamie-Lynn Sigler, best known for her role as Meadow Soprano on "The Sopranos."

Platinum, a $500 million New York firm headed by Mark Nordlicht, loaned at least $50 million to Banyon. Centurion's exposure was at least $20 million. The New York firm, with more than $400 million under management, is headed by Murray Huberfeld. As of September, the firm's flagship Centurion Credit Group fund claimed a four-year track record with only one down month.

As investors await action by the bankruptcy court, many are planning lawsuits aimed at various parties in the alleged fraud, including TD Bank. Investors were told in early 2009 that $570 million was being held in an escrow account at a TD branch in Osceola, Fla. Some investors now accuse bank officials of offering false assurances about the money. TD Bank has said it is cooperating with the investigation.