How one man stood up to expose a major Ponzi scheme.
On a recent trip to Florida, I met with Alan Sakowitz, the whistleblower who alerted the FBI to flamboyant Fort Lauderdale attorney Scott Rothstein's massive Ponzi scheme that is suspected of bilking investors of over $1.2 billion.
I had previous contact with Alan, who has advertised on Aish.com from time to time on behalf of various Jewish causes. After reading news reports of how Alan tried to stop the billion-dollar fraud, I thought there may be a good lesson or two to share with our Aish.com readers. And sure enough there was.
Aish.com: How did you get involved in this whole Scott Rothstein affair?
Sakowitz: Since I’m a real estate developer and attorney, and always seeking opportunities for my investment group, a broker introduced me to Scott.
In August 2009, a friend and I met with Scott at his South Florida law firm. I walked into Scott’s office and immediately got the sense that this was the center of power. The walls were plastered with hundreds of awards and plaques from charitable causes – hospitals, a synagogue, schools – plus photos of Scott with the governor of Florida, the Broward County Sheriff, the Fort Lauderdale chief of police, and an assortment of famous athletes, entertainers and other politicians. His law firm had 70 attorneys on staff and from all appearances he was totally legit.
Aish.com: What kind of investments was he offering?
Sakowitz: He told my friend and me that his main business was employment discrimination and sexual harassment cases. He explained that a standard part of these deals is that the victim agrees not to discuss details of the settlement with anyone. In order to ensure that, the money is deposited in a trust account, then paid out in installments over the course of a few months or a year. So the “investment opportunity,” Scott explained, was that many of his clients were willing to sell the rights to collect the settlement money – on deals that were already concluded and funded and had almost zero risk – in exchange for a percentage of that amount in cash right away.
This totally broke any correlation I’d ever seen between risk and return.
The cases that appealed to us involved $900,000 settlements, payable over three months. Scott said that his clients were willing to sell the rights to payment for $660,000. I quickly did the math in my head: In three months, this investment would return a profit of $240,000. Figured per annum, I knew it was an unbelievable return (I later calculated it as 207%). This didn’t make sense and raised a red flag: Why would anyone be willing to take $660,000 today, when they could just wait 30 days to get $300,000, and have the entire $900,000 at the end of 90 days? This totally broke any correlation we’d ever seen between risk and return.
Aish.com: So why were these being offered at such a deep discount?
Sakowitz: Scott tried a few different explanations, hoping that one of them would sound reasonable. He told me that many of his clients are poor people who barely make ends meet, and simply cannot hold out another few months to receive their money. But this didn’t make sense – they could just borrow $10,000 from a loan shark to tide them over for a month until the first $300,000 payment comes in, and still make out far better than the astronomical discount they were offering to Scott’s investors. Especially someone who was poor, I reasoned, would not be so frivolous with a windfall.
I got even more suspicious when Scott offered me a piece of advice: “Buy a shredder and shred everything in both directions.” I noticed that he had a revolver strapped to his ankle. Something was wrong here, but we didn’t know if he was offering legitimate deals or was a total fraud.
Aish.com: So how did you come to a conclusion?
Sakowitz: I met with Scott again to get more information. Based on what he told me, he was settling 3,000 cases per year – all settled without filing a single law suit, with the smallest payout being half a million dollars. That comes out to 12 cases each work day, paying out at least $1.5 billion per year! This seemed like an impossible number and was an immediate red flag.
So I asked him to show me the actual documents from the settlements, but he refused.
I asked to speak with the attorneys in his firm who were handling the cases, and he claimed to be personally handling all the cases himself.
I requested to meet some of his clients, and he tried to change the subject.
By the end of three meetings, I was convinced that Scott was a total fraud, and I was 90% certain he was running a Ponzi scheme where, in reality, there were no cases. Scott was simply planning to take my money to pay off the investors whose money he had taken the week before, and then take the next guy’s money to pay me off.
Aish.com: Based on the numbers he was claiming, and his unwillingness to give you access to any hard data, it sounds pretty clear-cut.
Sakowitz: Yes. I walked out of our third meeting and, after doing more research, I knew I had to blow the whistle. I’m not the kind of person who looks for trouble. I would prefer to build people up. But if trouble is staring me in the face, I can’t walk away from it. The Torah says that when someone is being hurt, you can’t stand by and let it happen.
When someone is being hurt, you can’t stand by and let it happen.
People told me that I should just forget about the whole thing, that Scott knows too many people and I could be putting myself in danger.
I was afraid to call the police because Scott seemed to have everyone in his back pocket. City, county and state officials were all lined up behind him. The former sheriff (who had just gotten out of jail on corruption charges) was working for him. I was afraid that the whole thing could backfire and, whether real or imagined, I had to consider the possibility that someone would take revenge and either frame me for some crime or pay me a visit in the middle of the night.
But I felt that I had no choice. It was just a question of how to do it in the safest way.
Aish.com: So what did you do?
Sakowitz: I decided to contact the FBI. I figured they were the law enforcement agency least likely to have been infiltrated by Scott and his money, since they don’t accept political contributions.
Before calling the FBI, I needed to know I had done everything to ensure that my information and analysis was as accurate as possible. So I called my rabbi, and he put me in touch with one of the leading Torah scholars of our generation. The amazing thing about these great rabbis is they are so accessible. He immediately took my call without ever asking who I am. When I explained the situation, he told me that I should do everything within my power to prevent others from being harmed. He said that “every human being is precious and their money is precious as well.”
He also cautioned me that, given the chance I was wrong, I should do everything possible to ensure that neither Scott nor his law firm was harmed in the event there was a legal explanation for all this. But he encouraged me to act right away and not to wait until I gathered further proof, since I already had sufficient cause to believe that Scott was a danger to the public. He gave me a blessing and we ended the conversation.
My next call was to the FBI.
Aish.com: Did they arrest Scott immediately?
Sakowitz: Not exactly. A few weeks after I contacted the FBI, Scott’s entire operation – the scam as well as his law firm – collapsed. It was simply unsustainable at that level and they ran out of money. Scott had put himself on a treadmill on steroids. It was just going too fast. In order to stay ahead of the game, each successive “deal” had to bring in more money than the previous one. So as the thing grew, he became more and more desperate for money and was reaching out in all directions, offering incredible rates of return just to get that money in his hands – so he could pay off the previous investor, sustain his flamboyant lifestyle, and keep the whole thing afloat. It was destined to collapse, and when it did, it was probably a relief for him.
But before the FBI could arrest Scott, he fled the country to Casablanca. Then he inexplicably came back, apparently thinking that he could fix things up, perhaps by buying his way out of trouble. Or maybe he thought he’d be safer in jail than out there where his bilked investors could find him, He was arrested a few weeks later and is now being held on federal racketeering charges at the Federal Detention Center in Miami.
Aish.com: The real mystery is why nobody turned Scott in previously. He had been operating his Ponzi scheme for over four years and living very ostentatiously. Many of these were savvy businesspeople. Didn’t anybody recognize what to you was obvious? Were they all fooled?
Sakowitz: There are a few possible reasons why nobody else blew the whistle. I have no idea which individuals fall into which group, but my assessment is that some people spotted the scam, but weren’t willing to get involved in trying to stop it. They just closed their eyes and walked away, happy they were not taken.
Second, there were those who knew it was a scam, but figured they could put in their money, make a quick profit, and then take their money out again before the whole thing collapsed. For the chance to double their money, they thought the risk was worth it. Some of them succeeded, but many got stuck holding the bag. Actually, those who got their money out may wind up losing too because prosecutors are trying to recover that money as a way to pay off Scott’s massive debts. Also some of “investors” were earning a commission by bringing in other investors. There was money to be made, even if the principal was later lost.
It’s extremely difficult to be rational when there’s so much to gain.
The third group – which I think is the majority of people – were simply blinded by the big money being offered. When a pot of gold is sitting there, people are willing to become ostriches with their heads in the sand. The whole set-up was too enticing and it’s extremely difficult to be rational when there is so much to gain. If Scott had been offering more modest returns of 10%, someone probably would have blown the whistle a long time ago. But because it was such high returns, the only question many people had was, “Where do I wire the money?”
Aish.com: But there had to be some degree of believability behind the pitch as well.
Sakowitz: Absolutely. Scott’s whole set-up was designed to support an illusion. If his pitch had been made in a seedy warehouse, nobody would have given him the time of day. But Scott tossed tens of millions of dollars to political campaigns, charitable causes and business ventures in order to buy himself those plaques on the wall and create an air of success and a reputation beyond reproach. He was appointed to the Judicial Nominating committee for the 4th District Court of Appeals. He had 24-hour police protection. He served on the governor’s kitchen cabinet. All this was designed to blur the lines between reality and illusion. It’s like Disney World where they give you 3-D glasses – everything seems within reach and it feels so real. But it was all a facade.
Aish.com: So what made Alan Sakowitz respond differently?
Sakowitz: I think the reason I was able to walk out the same person I walked in is because I live in a tight-knit community that is very grounded in its values. My friends and neighbors in North Miami Beach really treat each other as human beings, not as bank accounts. Scott was all about buying recognition and honor, to get some plaque on the wall, whereas in my community the norm is to give charity and do good deeds anonymously. Because I have these role models to come home to every day, that made it easy to see the difference between truth and falsehood. I also grew up in a home where I saw that a life well lived was measured by helping other people, not by what one had.
I don’t look at myself as brilliant or any kind of hero. I try to live by Torah values. So when the situation called for clarity, I was just ready to step up to the plate. And it felt good to do the right thing.
Aish.com: People lost tens of millions of dollars. But does the fallout of Scott’s scam go beyond just the stolen money?
Sakowitz: What Scott did affects all of society. When people hear about this supposedly legitimate firm of 70 lawyers being run by a crook, about public officials being bought off (or at best asleep at the wheel), about documents being forged – they lose confidence in the entire system. This affects people’s willingness to get involved in legitimate business opportunities. And in a general sense it makes people cynical about trusting anyone. That’s a tragedy for all of society.
Aish.com: What do you think was the psychology that enabled this scam to flourish?
Sakowitz: A lot of what’s behind all this is the idea of being satisfied with what you have, and not always looking sideways to begrudge if the other guy has more. If people would just appreciate their portion and be happy for the success of others, we wouldn’t have so many of these scams happening.
Scott fell into this trap. He bought a $5 million Warren yacht, and a fleet of exotic cars including a Bentley, Rolls-Royce, two Lamborghinis, two Ferraris, and two Bugatti sports cars worth $1.6 million each. There’s really no limit to our human appetite for wealth and power. A person needs to know when enough is enough.
If someone would have helped him, things could have ended differently.
What’s sad about this story is that Scott is obviously a very talented guy. He could have used those talents to help people and to make a really good life for himself. It’s all a matter of where a person channels his energies. There was obviously a point in Scott’s life where he was a decent guy who just needed help. If someone would have reached out to help him, this whole thing could have ended very differently.
Aish.com: What’s your personal take-away from all this?
Sakowitz: After the story broke, I got a lot of calls and emails from people thanking me for what I did. Several people said that it gave them a good feeling to know that someone cared about others beside himself.
One comment that was particularly gratifying came from two veteran attorneys who had been friends with my father since high school. They called to ask me my relation to Teddy Sakowitz. When I said he was my father, they said they figured as much "because that's what Teddy would have done."
Most of all, this episode makes me appreciate living in a community with real people, whose primary value is something other than chasing material things. I work very hard as a businessman, and I enjoy a worthwhile investment. But I also know that if there’s money coming to me, G-d will make sure that I earn it in a respectful and honest way.
Especially in a culture where so many smart people have been taken so often, it’s really important to be grounded in a community that shares common values, where people can support each other and can serve as an objective gauge of behavior. That enabled me to keep my eyes open and use common sense, without being seduced by the pot of gold.