Securities Law Blog

President and founder of Capitol Investments USA, Inc., Nevin K. Shapiro, has been criminally charged with securities fraud and money laundering by federal prosecutors from the U.S. Department of Justice in New Jersey. According to court documents, the Miami Beach-based businessman allegedly raised over $880 million from at least sixty investors by selling securities that he claimed would fund Capitol’s grocery diverting business.

Capitol’s business was purchasing lower-priced groceries from vendors in one region of a country and reselling them for profit in another region where the prices were higher.

The Securities and Exchange Commission (SEC) also filed civil charges against Shapiro for what they claim to be a $900 million Ponzi scheme.

According to the SEC complaint, the fraud that began in February 2003 and ran through November 2009 developed into a Ponzi scheme in January 2005 when Capitol had “virtually no legitimate business.” In 2005 Shapiro allegedly began using new investor money to make principal and interest payments in typical Ponzi fashion.

Shapiro allegedly enticed investors to purchase his “risk-free securities” promising rates of return up to 26% annually. The SEC alleges that Shapiro made several other misrepresentations to investors, including that the company had a successful track record with gross sales of $64 million in 2008 and projected sales of $70 million in 2009. Shapiro allegedly provided investors with fabricated invoices and purchase orders for nonexistent sales.

The SEC’s complaint alleges that Shapiro misappropriated at least $35 million for personal use. Shapiro allegedly used the money to cover gambling debts, purchase luxury cars and tickets for sporting events, pay for his $5 million dollar home in Miami Beach, make large donations to local universities, and fund his other business ventures.

When Capitol filed for bankruptcy in November 2009, investors were owed more than $80 million.

The SEC is charging Shapiro with violating antifraud provisions of the federal securities laws. The industry regulator is seeking a permanent injunction, sworn accounting, disgorgement of ill-gotten gains and financial penalties against Shapiro.

The owner and four employees of Gryphon Holdings Inc. were arrested April 20, 2010 for allegedly operating an internet-base scam that misled investors into paying fees for phony stock tips and investment advice. The president of the Staten Island financial advisory firm, Kenneth Marsh, and four others have been charged with conspiracy to commit securities fraud and wire fraud and a single count of wire fraud. If convicted they could each face up to 20 years in prison, according to the U.S. Attorney’s office in Brooklyn, NY.

The Securities and Exchange Commission (SEC) also filed civil charges against the firm, Marsh, and the four employees.

The SEC alleges that since at least 2007 Gryphon used numerous material misrepresentations to lure clients to purchase its services. Gryphon allegedly fabricated advisor credentials, including possessing valuable experience with major Wall Street firms and degrees from prestigious academic institutions. The firm allegedly claimed to have offices around the world, when in reality they operated their dealings from a Staten Island strip mall.

According to prosecutors, the majority of the victims are reported to being elderly retirees who received unsolicited emails and telephone calls promoting the firm’s services.

The advisory firm allegedly charged between $99 and $250,000 for securities recommendations which the SEC said were falsely claimed to have been based on “sound research and successful strategies of trading experts with superior knowledge.”

According to the SEC complaint, over the course of the past three years, Gryphon acquired more than $17.5 million for fees and services.

The Securities and Exchange Commission (SEC) filed civil fraud charges against Goldman Sachs & Co. and one of its vice presidents in federal court in Manhattan on April 16, 2010. The SEC alleges that Goldman Sachs defrauded investors by misstating and failing to disclose key information about a financial product tied to subprime mortgages.

The claim alleges that Goldman Sachs was paid $15 million by one of the world’s largest hedge funds, Paulson & Co., for structuring and marketing a synthetic collateralized debt obligation (CDO), known as ABACUS 2007-AC1 (ABACUS). This complex investment vehicle was based on the performance of subprime residential mortgage-backed securities (RMBS).

According to the complaint, Paulson “played a significant role” in picking which RMBS should make up the portfolio. Allegedly “Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs & Co. to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future.”

The SEC alleges that marketing materials for ABACUS represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. Goldman Sachs allegedly failed to disclose to investors that Paulson, which was in-line to benefit should the RMBS default, played a considerable role in the makeup of the portfolio.

The industry regulator alleges that Goldman Sachs Vice President Fabrice Tourre, 31, was “principally responsible” for ABACUS. It claims that Tourre structured the transaction, prepared the marketing materials and communicated directly with investors.

The $15 million deal between Paulson and Goldman Sachs to begin the structuring and marketing of ABACUS allegedly began April 26, 2007. According to the complaint, by October 2007, 83% of the RMBS in the portfolio had been downgraded, and by Jan 2008, 99% had been downgraded.

Investors in the mortgage securities are alleged to have lost more than $1 billion, while the sinking market gave Paulson a profit of about $1 billion.

The Quadrangle Group LLC has agreed to pay $12 million to settle the Securities and Exchange Commission’s (SEC) claim that the investment firm was linked to a widespread multi-billion dollar kickback scheme to obtain investments from the $130 billion New York State pension fund.

The SEC alleges that Quadrangle secured a $100 million investment from the New York State Retirement Fund after former executive Steven L. Rattner arranged for an entertainment company, owned by Quadrangle, to distribute the DVD for a low-budget film produced by former New York State Deputy Comptroller, David J. Loglisci, and his brother.

According to the SEC’s complaint, filed in federal district court in Manhattan, Rattner worked with Henry Morris, top political advisor and chief fundraiser for former New York State Comptroller Alan Hevesi , to obtain investments from the Retirement Fund.

Allegedly Morris presented the idea of helping Loglisci’s brother to distribute his film “Chooch” through Quadrangle’s connections at Good Times Entertainment (GT). Following several failed attempts by Loglisci’s brother to convince GT Entertainment’s CEO to distribute the film, Rattner allegedly emailed the CEO with instruction to “dance along” with Loglisci’s brother while he figured out whether Quadrangle “needed” the distribution deal in order to secure an investment from the Retirement Fund.

The SEC alleges that three weeks after GT Entertainment agreed to distribute the DVD, Loglisci notified Rattner that the Retirement Fund would be investing $100 million in the Quadrangle fund. Since the fund’s investment in 2005, Quadrangle has received $5 million in management fees.

Without admitting or denying wrongdoing, Quadrangle has agreed to pay $7 million to the pension fund and $5 million to the SEC.

On April 6, 2010 a securities arbitration panel ordered a former Morgan Stanley & Co. broker to pay the firm $1.6 million to resolve a case involving his signing bonus.

When Thomas G. Hicks III joined Morgan Stanley in 2006, he received his signing bonus in the form of loans secured by three separate promissory notes.

The bonuses, handed out to attract brokers to join a firm, come in the form of a loan that is forgiven in annual installments until completely forgiven. Since the loans are secured by promissory notes, if a broker leaves, before the repayment term is over, the broker is required to repay the remaining balance.

Morgan Stanley filed a case against Hicks back in 2008 alleging a breach of the three promissory notes for the signing bonus. According to the Financial Industry Regulatory Authority (FINRA), Hicks left the firm in the fall of 2007, less than two years after joining. FINRA ordered Hicks to pay his former employer $1.6 million, which includes Morgan Stanley’s legal fees, costs and $196,000 in interest. In a similar case, on April 7, 2010 FINRA ordered a Las Vegas financial adviser to pay Citigroup Inc. $384,000 plus interest for leaving the firm before his signing bonus had been completely forgiven.