On April 21, 2010, the Securities and Exchange Commission filed an action in the U.S. District Court for the Southern District of Florida, against a prominent Miami Beach-based businessman, Nevin K. Shapiro, alleging that he conducted a $900 million offering fraud and Ponzi scheme targeting more than 60 investors nationwide.
The SEC claims that from February 2003 through November 2009, Shapiro, the founder and president of Capitol Investments USA Inc., (Capitol), a Miami Beach-based grocery diverter, sold promissory notes that offered annual returns ranging from 10% to 26%. These promissory notes were allegedly backed by purchase orders and receivables generated by Capitol’s food brokerage business. Capitol operated at a loss since late 2004, however, and essentially had zero 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.
Capitol’s business as a grocery diverter involved purchasing lower-priced groceries in one region and re-selling them for a profit to another region with higher prices. 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. In doing so, Shapiro made numerous misrepresentations to the investors, including that: (1) he would use their funds as short term financing to purchase and resell groceries for Capitol’s business; (2) Capitol was financially successful; and (3) Capitol would pay the principal and interest from the profits it received when it resold the goods. Moreover, Shapiro showed investors fabricated invoices and purchase orders for sales that did not exist whenever the investors questioned Capitol’s business.
The SEC further claims that Shapiro misappropriated at least $38 million of investor funds to support his lavish lifestyle and finance outside business ventures unrelated to the grocery business, including a sport representation business and real estate ventures. He also used approximately $13 million of investor funds to pay large undisclosed commissions to individuals who attracted other investors.
The SEC has charged Shapiro with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.