FINRA Lawyer Blog
On January 16th, a settlement was reached to create new fiduciary committees to handle a complex transition at the bankrupt Woodbridge firm, following a SEC lawsuit over a billion-dollar Ponzi scheme run by Woodbridge founder Robert Shapiro, who will now be totally excluded from the restructuring process.
Upon approval of the settlement, Judge Kevin Carey said, “As a condition for approval I require that that if any services beyond transition services are to be desired by the debtor, you need court approval with or without SEC consent.”
After Woodbridge filed for bankruptcy, Shapiro allegedly continued having access to company offices, and was paid a monthly $175,000 consulting fee. By designing a new team with no links to Shapiro to facilitate the transition, the settlement ensures decisions will now be made in the defrauded investors’ best interest.
The Workings of a Shapiro’s Elaborate Ponzi Scheme
Last December, Shapiro had been accused by the SEC of defrauding over 8,400 inadvertent investors, including a large percentage of seniors, in a $1.2 billion Ponzi scheme. Woodbridge, which operated in six states and had about 140 employees, was the main company used by Shapiro to implement the alleged fraud scheme.
The Woodbridge Group of Cos. LLC marketed securities promising annual yields as high as 8 percent. Payments were supposed to come from interest paid by borrowers to a Woodbridge affiliate. However, the interest paid by a modest number of actual borrowers was nowhere near enough to pay off Shapiro’s vast network of sales agents.
According to the SEC complaint,
“Despite receiving over $1 billion in investor funds, Shapiro and his companies only generated approximately $13.7 million in interest income from truly unaffiliated third-party borrowers… Without real revenue to pay the monies due to investors, Shapiro resorted to fraud, using new investor money to pay the returns owed to existing investors.”
About $400 million of the funds “invested” by Woodbridge clients came from Individual Retirement Accounts.
Besides paying off early investors with money from new investors, Shapiro allegedly used some of the fraudulently obtained funds to maintain a luxurious lifestyle. According to the lawsuit, the defendant and his family,
“lived in the lap of luxury and spent exorbitant amounts of investor money in alarming fashion, on items such as luxury automobiles, jewelry, country club memberships, fine wine and chartering private planes… The effect of Shapiro and his companies’ actions will leave investors with substantial losses, as they are owed at least $961 million in principal.”
The fraud was first exposed on December 1st, 2017, when Shapiro lacked the funds to pay dividends and interest to investors for the first time, and Woodbridge filed for bankruptcy. The SEC promptly issued several subpoenas seeking internal communications between Shapiro and senior management at Woodbridge. But the company failed to submit the documents.
According to the text of the SEC complaint, none other than Shapiro is responsible for the fraud and all its consequences: “Shapiro, as the sole person in control of the corporate defendants, not only made material misrepresentations and omissions to investors, but also signed falsified documents, controlled the company’s bank accounts, made Ponzi payments to investors, paid significant sales commissions to unregistered sales agents, and misappropriated investor funds for his own personal enjoyment and the enjoyment of his family.”
According to the SEC, Shapiro, a California native, used several sham companies that were actually controlled by him to pose as “third-party borrowers” who were portrayed to investors as paying Woodbridge affiliates between 11 and 15 percent of interest on loans. Investors were also told Woodbridge was making a profit from buying, renovating, and selling real estate.
“Virtually none” of the hundreds of agents used by Woodbridge to find investors through media ads, seminars, and other marketing methods, were registered with regulatory agencies according to the SEC. The sales agents received over $64 million in commissions.
The Hollywood Star Real Estate Connection
Woodbridge was not the only company that went down when Shapiro’s Ponzi scheme was exposed. The luxury brokerage firm Mercer Vine, which brokered the sale of star properties in Los Angeles, has been named as a relief defendant in the lawsuit. Shapiro was Mercer Vine’s financier, and the company was shut down soon after allegations of his fraudulent scheme became public.
Mercer Vine rose to notoriety after just two years of operation, listing 8-figure homes that formerly belonged to the likes of Marilyn Monroe, Aaron Spelling, and Sonny & Cher. The company listed some of Hollywood priciest properties at $90 million and even $200 million, in the case of a mansion formerly owned by Spelling.
A consultant who maintained a professional relationship with Mercer Vine has commented that the company’s employees “were trying to build something that was legitimate, and they got duped.” Reportedly, all agents who were employed by Mercer Vine have sought work at other firms following the Ponzi-scheme scandal.
Shapiro’s wife, Jeri, who was VP at Woodbridge for several years, has also been named as a relief defendant in the lawsuit. The complaint alleges she owns assets, including real estate, purchased with proceeds from the scheme, i.e. investor funds.
A spokesperson for Shapiro told reporters that the defendant is “cooperating with the bankruptcy to protect the assets held for the benefit of Woodbridge’s stakeholders,” and “denies any allegation of wrongdoing.”
Is the SEC targeting your business based on a Ponzi allegation or a civil RICO charge? At Herskovits PLLC we work solely on investment, SEC, FINRA, and other securities based cases. Call Us at 212.897.5410 to learn your options or Connect Online.