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Rothstein Fund Manager Fights $48 Million SEC Judgment

Law360, Miami (November 17, 2016, 5:02 PM EST) A Florida investment fund manager who funneled investor money into Scott Rothstein’s $1.2 billion Ponzi scheme asked the Eleventh Circuit on Thursday to reverse the $48.5 million judgment against him, arguing that he was the biggest victim of the scheme.

Michael Pineiro of Marcus Neiman & Rashbaum LLP, who argued before the appeals court in Miami, said his client George Levin, who ran two funds that invested exclusively in Rothstein’s scheme, lost all of his money when the scheme collapsed, as did several family members and friends.

Pineiro argued that the district court erred in granting summary judgment to the U.S. Securities and Exchange Commission on allegations that Levin failed to register the securities he offered through his funds. Levin was relying on the SEC’s safe harbor regulations in Rule 508 of regulation D, which exempt from registration securities that are issued in limited private offerings, but the judge ruled that the Rule 508 exemption does not apply to SEC enforcement actions.

Jeffrey Berger, who argued for the SEC, told the court that the judge got it right and that the agency’s interpretation of the regulation was a widely accepted one.

“Every securities expert looking at this has read Rule 508 in the same way,” Berger said. “I think that’s telling.”

In addition, Pineiro argued that U.S. District Judge Ursula Ungaro should have granted Levin the one week extension of the trial that he had requested because of a medical emergency that left him hospitalized in Panama with chest pains just before it was set to begin. Because of this, he missed the first day of trial, which included jury selection and the first witness.

“We know it wasn’t a criminal case and he has no constitutional right to be there, but it’s quasi-criminal,” Pineiro said. “This was not a slip-and-fall case. The SEC sought $180 million.”

The judges pointed out though that he could have stayed home the weekend before such an important trial.

“Wouldn’t it have been wiser simply to stay here?” said U.S. Circuit Judge Stanley Marcus.

A jury found Levin liable in April for securities violations related to his Banyon investment funds, which were the largest feeder funds in Rothstein’s scheme.

The SEC claimed that Levin and fellow investment manager Frank Preve purchased supposed legal settlement awards from Rothstein and resold them as securities in the form of promissory notes from Banyon 1030-32 LLC or later as interests in their private investment fund, Banyon Income Fund LLP.

They allegedly raised $157 million from 173 investors by selling the unregistered securities, which their investment literature purported to have verified. The securities were shares in sham legal settlements peddled by Rothstein through his law firm, Rothstein Rosenfeldt Adler PA, between 2005 and October 2009.

In August 2014, Preve pled guilty to a criminal charge of conspiracy to commit wire fraud. He further entered into a consent judgment against him in the SEC’s civil suit.

The SEC requested $57 million in disgorgement, $11.3 million in interest and a $5.7 million civil penalty, as well as disgorgement of $49 million for ill-gotten gains, $9.6 million in related interest and a $49 million related civil penalty against Levin, according to court records.

In July 2015, Judge Ungaro ordered Levin to pay $40.9 million in disgorgement and $663,000 in civil penalties. The total topped $48 million when interest was added.

U.S. Circuit Judges Joel Dubina and Stanley Marcus and Judge Richard W. Goldberg of the International Court of Trade sat for the Eleventh Circuit.

Levin is represented by Daniel L. Rashbaum and Michael A. Pineiro of Marcus Neiman & Rashbaum LLP.

The SEC is represented by Jeffrey Alan Berger.

The case is Securities and Exchange Commission v. Levin, case number 15-14375, in the U.S. Court of Appeal for the Eleventh Circuit.