On April 21, 2010, The Securities and Exchange Commission charged a Miami Beach, Florida-based businessman with fraud for orchestrating a $900 million offering fraud and Ponzi scheme. The SEC alleges that Nevin K. Shapiro, the founder and president of Capitol Investments USA, Inc., sold investors securities that he claimed would fund Capitol’s grocery diverting business. Shapiro told investors that the securities were risk-free with rates of return as high as 26 percent annually. Instead, Shapiro was actually conducting a Ponzi scheme and illegally using investor money to pay for unrelated business ventures and fund his own lavish lifestyle. When investors questioned Capitol’s business, Shapiro showed them fake invoices and purchase orders for nonexistent sales.

“Shapiro lured investors by falsely claiming that Capitol’s securities were risk-free investments with extraordinarily high returns,” said Eric I. Bustillo, Director of the SEC’s Miami Regional Office. Shapiro used his prominence and prestige to gain investors’ rust in funding Capitol’s grocery diverting business, but behind their backs he diverted their money to enrich himself.”

Grocery diverters like Capitol purport to purchase lower-priced groceries in one region and resell them for a profit to another region where prices are higher. According to the SEC’s complaint, Shapiro used his business relationships and word-of-mouth to solicit investors and sell them short-term promissory notes. South Florida investors previously were victimized in the 1990’s by the Premium Sales Ponzi scheme that purported to be a grocery diverter.

According to the SEC’s complaint, Capitol was operating at a loss by late 2004 and had virtually no operations by 2005 when, in a classic Ponzi-scheme fashion, Shapiro began using funds from new investors to pay principal and interest to earlier investors. In addition,

Among the alleged misrepresentations that Shapiro made to investors:

1. He falsely told investors their funds would be used as short-term financing to purchase and resell groceries for Capitol’s business.

2. He falsely touted Capitol’s financial success as well as his own.

3. He falsely assured investors that their principal was secure because Capitol would not broker the sale of the goods without first obtaining a purchase order from a buyer.

4. He falsely told investors that Capitol would pay the principal and interest from the profits it received when it resold the goods.

The SEC’s complaint further alleges that Shapiro stole at least $38 million of investor funds form himself and used investors’ money to pay for outside business activities unrelated to the grocery business, including a sport representation business and real estate ventures. His lavish lifestyle included a $5 million home in Miami Beach, a $1 million boat, luxury cars, high-stakes gambling, and season tickets to premium sporting events. Shapiro additionally used approximately $13 million of investor funds to pay large undisclosed commissions to individuals who attracted other investors.

While little, if any, of the investment losses are expected to be recovered directly from Shapiro, there remains the possibility that lawsuits against the brokers who were paid commissions to solicit investors or banks, brokerage firms, law firms, or accounting firms that may have been involved or affiliated with the Ponzi scheme may result in a recovery of some of the investment losses.

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