Main Street Investors Are The Target Of A $1.2 Billion Ponzi Scheme

• Posted on: Jan 10 2018

Ponzi schemes remain a familiar and unfortunate risk for investors. Because Ponzi schemes purport to offer high returns with little or no risk, and rely on inflated credentials of a financial professional, investors are attracted to the investment products these scammers offer. Often, Ponzi schemes are perpetrated on specific groups of people sharing common interests, such as a church or charitable group. (Fraudulent sales practices that target specific organizations or groups is referred to as Affinity Fraud.)

The most notorious Ponzi scheme in recent years was perpetrated by Bernie Madoff. In 2016, there were 59 Ponzi schemes uncovered in the United States, with losses totaling $2.4 billion, according to the website Ponzitracker (here). (See Financial Times, “Investors beware: the Ponzi scheme is thriving,” March 30, 2017. Here.)

On December 21, 2017, the Securities and Exchange Commission (“SEC”) announced (here) that it brought charges, and sought an asset freeze, against Robert H. Shapiro  (“Shapiro”), a luxury real estate developer, and a group of unregistered investment companies called the Woodbridge Group of Companies LLC (“Woodbridge”), for bilking thousands of retail investors, many of them seniors, in a $1.2 billion Ponzi scheme.

The SEC action followed proceedings in September and November of 2017, in which it obtained court orders forcing Woodbridge to produce the corporate records of several company executives and employees, including Woodbridge’s President and CEO, to SEC investigators. (Here and here).

“We allege that through aggressive tactics, Woodbridge and Shapiro swindled seniors into a business model built on lies, which the SEC’s Miami Regional Office staff moved to halt,” said Stephanie Avakian, Co-Director of the SEC’s Enforcement Division.

According to the SEC’s complaint (here), from July 2012 through December 4, 2017, Shapiro and Woodbridge defrauded more than 8,400 investors in unregistered Woodbridge funds. At least 2,600 of these investors unknowingly placed their retirement savings into Shapiro’s Ponzi scheme.

“Our complaint further alleges that Shapiro used a web of layered companies to conceal his ownership interest in the purported third-party borrowers,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office.  “Shapiro used the scheme to line his pockets with millions of investor dollars.”

The SEC claims that Woodbridge advertised its primary business as issuing loans to third-party commercial property owners, who were paying Woodbridge 11-15 percent annual interest for “hard money,” short-term financing.  In return, Woodbridge promised to pay investors 5-10 percent interest annually.  While Woodbridge claimed it made high-interest loans to third parties, the SEC alleges that the vast majority of the borrowers were Shapiro-owned companies that had no income and never made interest payments on the loans.

The SEC also noted that investors had difficulty cashing out their investment. In that regard, Woodbridge and Shapiro used their marketing materials to convince investors to keep their money with Woodbridge by boasting that “clients keep coming back to [Woodbridge] because time and experience have proven results.  Over 90% national renewal rate!”

“Our complaint alleges that Woodbridge’s business model was a sham,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division. “The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money.”

The SEC alleged that Shapiro and Woodbridge used investors’ money to pay other investors, and paid $64.5 million in commissions to sales agents who pitched the investments as “low risk” and “conservative.”  Shapiro is alleged to have diverted at least $21 million for his own benefit, including to charter planes, pay country club fees, and buy luxury vehicles and jewelry.  According to the complaint, the scheme collapsed in early December 2017 as Woodbridge stopped paying investors and filed for Chapter 11 bankruptcy protection. Shapiro resigned as Woodbridge’s chief executive officer on December 1, days before Woodbridge filed for bankruptcy protection.

Shapiro has “denie[d] any allegation of wrongdoing,” said Ryan O’Quinn, a lawyer for Shapiro. According to O’Quinn, “Mr. Shapiro is cooperating with the bankruptcy to protect the assets held for the benefit of Woodbridge’s stakeholders.”

The court granted the SEC’s request for a temporary asset freeze against Shapiro and Woodbridge, and ordered them to provide an accounting of all money received from investors.

The SEC is seeking return of the ill-gotten gains with interest and financial penalties.

Takeaway

As noted in a prior Blog post (here), the SEC has warned investors to be vigilant in protecting themselves before they invest money. (Here.) This means asking questions, many of which are based upon the common features of a Ponzi scheme, e.g., high investment returns with little or no risk, overly consistent returns, unregistered investments, unlicensed sellers, secretive and/or complex strategies, issues with paperwork, and difficulty receiving payments. If these questions are not answered, investors should not be afraid to request more information. Any push-back or doublespeak should raise red flags. After all, as the proverb says: “if it sounds too good to be true, then it probably is.