In rare foray in bank financial crime cases, SEC sanctions TD Bank for employee conduct, as OCC

One month shy of the fourth anniversary of the eruption of the $1.2 billion money laundering and fraud scheme of Ft. Lauderdale attorney, Scott Rothstein, US federal regulatory agencies have acted. Rothstein, now disbarred and serving a 50-year prison term on federal wire fraud, money laundering and other charges, used his law firm’s trust accounts at Gibraltar Private Bank and Trust Co. and TD Bank in South Florida to fleece sophisticated investors in a scheme involving secret sexual harassment legal settlements which all turned out to be phony.

The Rothstein fraud burst into public view on Halloween Day 2009. Civil lawsuits by his fraud victims followed against the financial institutions. One case that went to trial was a lawsuit by a Texas company, Coquina Investments, which in January 2012 recovered $67 million from TD Bank after a 70-day federal trial in Miami.
The Office of Thrift Supervision issued a Cease and Desist Order against Gibraltar related to the Rothstein matter on October 15, 2010.

Yesterday, September 23, a trio of federal agencies that rarely take concerted action in a financial crime case announced civil penalty actions against TD Bank.

The actions by the Securities and Exchange Commission (SEC), Office of the Comptroller of the Currency (OCC) and the Financial Crimes Enforcement Network (FinCEN), all released on the same day, are based on distinct violations of laws in their respective jurisdictions.

The trio of agencies that announced their actions on September 23 imposed monetary penalties on TD Bank totaling $52.5 million, including $37.5 million assessed by the OCC and FinCEN, combined, and an additional $15 million levied by the SEC.

While it is common for the OCC and FinCEN to coordinate their regulatory actions against a financial institution, especially when it comes to violations of the Bank Secrecy Act, as they allege here, the role of the SEC in this matter is instructive for financial institutions that are caught up in situations where there is an effort to hold them responsible for the financial crimes of their customers.

The focus of the SEC action is on a former TD Bank Regional Vice President, Frank Spinosa, who was the bank’s principal contact with Rothstein. Rothstein has bragged in his depositions after his incarceration that he treated Spinosa to a “rock star lifestyle.”

Because of the crucial role the SEC pins on Spinosa in determining its action against TD Bank, it merits deeper scrutiny. The SEC cites Section 17(a)(2) of the Securities Act, which it says “prohibits any person, in the offer or sale of any security, from obtaining money or property by means of any untrue statement of material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.”

In also citing Section 17(a)(3) of the Securities Act, the SEC puts the basis for its action against the bank on the conduct of Spinosa. The SEC says this statute “prohibits any person, in the offer and sale of any security, from engaging in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

To complicate matters for financial institutions in similar situations, the SEC says that to violate Sections 17(a)(2) and 17(a)(3) there is no requirement to show “scienter” on the part of the institution. It underscores that only “negligence” need be shown. Scienter is often defined as “a state of mind often required to hold a person legally accountable for his acts.”

The SEC ruled that “as a result of (Spinosa’s) conduct…, TD Bank violated Sections 17(a)(2) and 17(a)(3) of the Securities Act.”

TD Bank’s ‘remedial’ efforts helped temper SEC penalty

In its Order, the SEC said it gave weight to “remedial acts promptly undertaken by (TD Bank) and cooperation afforded the (SEC) staff.”

The uncommon entry of the SEC in an otherwise standard case involving violations of the Bank Secrecy Act in which the traditional bank regulatory agencies, such as the OCC, FDIC and Federal Reserve, take the lead along with FinCEN, may signify a new day in bank supervision and enforcement in financial crime cases.

This raises the stakes for all financial institutions whose shares are publicly traded and which may be harboring an “enemy within” in the person of an employee whose misconduct may lead to very harmful consequences for the institution. It may also awaken securities regulators in other countries to new remedies they may wish to exercise in financial crime cases.