The Culprit Could Be Dead, But Local Tax Case Lives On
Monday, October 13, 2008
By the time FirstPay Inc. shuttered its doors and declared bankruptcy in 2003, the Silver Spring company was managing payroll operations for about 1,500 businesses and organizations. What few, if any, knew was that owner Mark Rothman allegedly skimmed about $11 million of the taxes FirstPay was supposed to pay on its clients' behalf.
According to federal court documents, Rothman orchestrated the scheme for three years, using the money for a private yacht, houses and a company slush fund. By the end, he had defrauded approximately 250 companies, the government contends. FirstPay's former clients -- small businesses, nonprofits, churches and temples -- never saw the letters from the Internal Revenue Service alerting them that they owed back taxes because FirstPay had swapped their mailing addresses with its own.
Half a decade later, some of FirstPay's clients are still battling the IRS in a messy bankruptcy case to determine who gets the last of FirstPay's assets, and whether some of the businesses that fell victim to the scam will have to pay taxes a second time.
"We have one job and one job only. And that is either to stop the IRS from being able to collect from these people, or alternatively, to collect as much money as we can find . . . to pay everybody's claims," said Jeffrey Orenstein, a lawyer representing the bankruptcy trustee.
For most of the clients, the FirstPay saga began with a fax. For others, it was a phone call. A few were only clued in by newspaper reports. One by one, they learned in May 2003 that Rothman had been declared dead, and that his company was closing.
With their payroll company suddenly out of business, most of Rothman's customers scrambled to figure out the status of their accounts. It was only when some called the IRS to find out where their tax payments stood that they discovered they were in a deep hole.
As of last month, more than 150 companies had filed claims in FirstPay's bankruptcy case. The groups included nonprofits such as Christ Church Children's Center of Bethesda, which found itself holding a $72,000 back-tax bill, and small businesses such as Bernstein & Robinson Dermatology of Bel Air, Md., which owed $207,356. AIDS charities, radio stations and even the National Petroleum Council all claim to have been ensnared.
No lawyers came to court to represent FirstPay, even as allegations in the bankruptcy proceedings mounted against Rothman. He had allegedly used clients' money to pay for a 42-foot sailboat, a $184,000 vessel christened the "Get Too." He was also accused of misusing client funds to pay the mortgage on a home for his father-in-law, to buy property in Maryland, and to hand out performance bonuses to his employees. Lawyers presented evidence that Rothman had wired thousands of dollars to a pawnshop he owned.
Rothman was in the British Virgin Islands when he was declared dead in 2003 of non-Hodgkins lymphoma, and his family purchased a grave for him at a cemetery in Olney. However, in 2007, a federal bankruptcy judge wrote that the Federal Bureau of Investigation had opened an inquiry into Rothman and the fraud allegations, including the question of whether he was still alive.
The FBI says Rothman's case is ongoing but declined further comment. Rothman's wife did not respond to a request for comment.
In fraud cases, the IRS generally requires businesses to cover any taxes that weren't delivered. Two FirstPay clients, the Washington nonprofits Bread for the City and the Family Place, had their debts forgiven under new IRS guidelines that make it possible in some rare circumstances. But many, if not most, of FirstPay's victims have settled with the IRS, paying their taxes after the government dropped late fees and penalties. Most have joined the bankruptcy case with hopes to recover some or all of the amount of their settlement.
Some, however, have refused to pay. Temple B'nai Shalom of Olney, recently featured in a Jewish Week article about its problems, owes $67,000 in taxes, and more than $100,000 with penalties. The IRS has placed a lien on its building.