The Corruption of Scott Rothstein

In Miles Away... Worlds Apart, Alan Sakowitz tells the story of the biggest financial fraud in South Florida history, from his unique perspective of a whistleblower. Throughout the book Sakowitz compares his close-knit neighborhood to the Scott Rothstein's greed.

Sakowitz takes us through the narrative of the events leading to the arrest of Scott Rothstein. He was contacted through a broker to invest in structured settlements offered by Rothstein. The investment was to buy a stream of payments from an employment dispute and deliver a lump sum payment to Rothstein's client.

Conversion of structured settlements is completely legitimate, but usually subject to regulation and judicial oversight. A victim may prefer a big lump sum instead of installment payments made over time. Certainly, the capital source in the middle is going to want some reward for exchanging cash today for future payments.

Rothstein was offering a huge reward for investors willing to be the capital source. In one example he was offering a $900,000 settlement, payable over three months for an investment of $660,000. Why would any plaintiff be willing to take $660,000 today when they could have the entire $900,000 at the end of 90 days?

For an investor, that is an incredible return. Even more incredible given the assurances from Rothstein that payments are guaranteed. Sakowitz found the returns and Rothstein's showmanship to be intoxicating, but was suspicious. The intoxication was enough for Sakowitz to have three meetings with Rothstein.

When asked about volume, Rothstein said he was settling 3,000 cases per year, all without actually filing a lawsuit. The smallest of his payouts was $500,000. When asked to speak to the attorneys handling the cases, Rothstein claimed he was personally handling all of the cases.

The biggest red flag for me was Rothstein acting as a seller of the settlements and the attorney for plaintiffs at the same time. There is a terrible conflict between trying to get the best financial deal for his clients at the same time he is trying to offer an enticing return for "investors." A real attorney would have advised his clients to get a better deal in structuring a settlement.

With all the red flags, it's easy to see why someone would think that the investment was a fraud and not get involved. It's a bigger step to call the authorities and make the assertion. Even being 90% sure that it was fraud, that leaves a 10% chance that you're wrongly accusing an innocent man, damaging both of your reputations.

Why did Sakowitz call the FBI? He interleaves stories from his close-knit community with stories of charity and self-sacrifice for the benefit of others. He writes about his parents as role models and wanting to set a fine example for others.

Rothstein's walls were plastered with hundreds of awards and plaques from charitable causes, plus photos of Scott with the governor of Florida, the Broward County Sheriff, the Fort Lauderdale chief of police, other politicians, famous athletes and entertainers. Given Rothstein's connection to the political establishment, the predicament becomes who do you call to tell you found the fraud. The Fort Lauderdale Police Department would be a bad a choice. It turns out that when Rothstein fled the country, he had a police escort to his plane from a lieutenant in the FLPD. After eliminating all of the other government organizations appearing on Rothstein's wall of shake-n-smile, he turned to the FBI. I found it interesting to hear how Sakowitz felt a sense a relief after making the call.

I was drawn to the story for a few reasons. Sakowitz runs Pointe Development Company, a real estate company. Like me, he is an attorney by training, working in the real estate industry. As a compliance professional, I am fascinated by the mechanics of fraud and Ponzi schemes. Sakowitz was kind enough to send me a copy of the book to review.

Although the book provided great information and perspective on the Rothstein fraud, I was hoping for more. Sakowitz provides plenty of information about his own background to show why he turned in Rothstein. He does not provide equivalent information to show how Rothstein went bad.

Most people do not wake up one morning and decide to perpetrate a fraud on his clients, friends, business partners and anyone who walks through his office door. Clearly greed was a factor. He must have seen an opportunity to sell a settlement for his own benefit. It's not clear that Rothstein felt the pressure to be a mover and a shaker or what the pressure was that made him initially step over the line. Clearly his extravagant lifestyle created the pressure to keep the scheme going. We certainly could guess at the rationalization Rothstein used to justify his crimes. Perhaps he thought he was supporting the political system, endowing charities and creating jobs.

I would have liked to read more about Sakowitz's thought process in deciding to report Rothstein to the authorities. Walking away is easy when you suspect a fraud. You merely risk passing on an investment. Reporting a fraud does put you at risk. If you're wrong, you risk the personal and professional repercussions.  If you accuse a person like Rothstein, who showed off a gun strapped to his ankle, you risk physical harm.

In the end, Rothstein was an evil man, blatantly stealing money. Sakowitz was a good man, who saw through the greed, and took the extra step to try and stop the evil man. That alone is makes a compelling story.

For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.