Opening

Nevin Shapiro had what many would consider a great life. He drove nice cars, had a beautiful home in Miami Beach, and spent his nights partying with famous athletes like Shaquille O’Neal. Shapiro was living the high life, and people assumed his high-roller lifestyle was funded by his business, Capitol Investments.

But, Shapiro’s business hadn’t conducted operations in years. The money was actually coming from investors who didn’t realize that their money was being used to pay old investors. That’s right, it was a Ponzi scheme… a $900 million dollar Ponzi scheme.

I’m Michael McLaughlin, and this is Scheme.

The beginnings Capitol Investments

Nevin Shapiro was born in Brooklyn, but when he was a kid his family moved to Miami Beach. It was there that Shapiro incorporated Capitol Investments USA in 1998. Capitol Investments was a grocery diverter, aka food broker. Thus, Capitol Investments was part of the billion dollar industry for product diversion.

The product diversion industry

Product diversion is when goods are shifted away from their authorized distribution channel without the consent of the manufacturer. Product diversion can happen in several ways.

  1. Let’s say that you create a hair care product that you only want sold in certain salons, to maintain its image as a prestige brand. But then you find out that your salons bought too much product and re-sold it to a pharmacy in another part of the country. You might be upset that your prestige brand now appears on the shelves of a drugstore.
  2. Product diversion is also used to take advantage of price differences across regions. Let’s say a manufacturer sells its product to distributors in the U.S. for $60 and to distributors outside the U.S. for $35. The international distributors might divert the product by selling it to retailers in the U.S. for $50. The U.S. retailers are happy to buy the product at a cheaper price, but this cuts into the U.S. distributor’s sales. And it might create an excess of product in the U.S.

Product diversion is kind of a sketchy business, and it sometimes results in lawsuits from angry manufacturers. But this is what Capitol Investments did; it bought diverted groceries and re-sold them at a higher price in different geographic regions.

Capitol Investments

Now Shapiro told people that Capitol Investments was highly successful, and they believed him. After all, he owned a $5 million home, a $1 million boat, and donated lots of money to the University of Miami. Besides, he showed sales invoices and customer orders to prove the business was legit.

So when Shapiro began raising money from investors in 2003, no one questioned him. Shapiro told investors he was selling so many groceries that he needed short-term bridge loans. He said the loans were risk-free because he had already made the sale, he just needed to fill the purchase order. Investors would be paid back in 30 days, and get a 10 to 26% return.

Investors were so happy with this deal that many chose to reinvest their principal. Some even took money out of their retirement account to invest more.

Shapiro ultimately raised about $900 million from 60+ investors. And he continued to talk about how great Capitol Investments was doing, saying it sold $64 million of groceries in 2008 and was on pace for $70 million in 2009.

Trouble brewing…

But in 2009 things went bad; Shapiro began having difficulty repaying investors. In July he convinced one investor to loan the company $170,000, saying he’d pay it all back in 5 days…but didn’t pay him a single dollar.

So investors started asking questions. They wanted to know where their money was; this was supposed to be risk-free! Shapiro came up with a variety of excuses: grocery stores were behind on their payments, his accountant was on vacation, etc.

But when Shapiro still didn’t pay, the investors had had enough. They forced Capitol Investments into bankruptcy. This is when things got really interesting.

The fraud is discovered

It turns out that Capitol Investments hadn’t done business in years. Remember how Shapiro said the firm did $64 million in sales in 2008? Well the company was insolvent by then.

The last time Capitol Investments had sales was in 2005 and 2006, when it did just $300,000 in sales. This wasn’t a multimillion-dollar successful business. Capitol Investments was a house of cards, and it couldn’t survive without constant injections of capital from new investors. That’s why Shapiro paid out $13 million in sales commissions to get people to bring him new investors. He constantly needed people to give him money, or else the whole thing would collapse.

It was a classic Ponzi scheme: convince people to give you money by telling them they can get rich quick, and if they ask for their money back convince new investors to give you more money so you can repay the first group of investors.

Aftermath

While Shapiro repaid $769 million over the years to keep the scheme going, he took at least $38 million for himself. This paid for his extravagant lifestyle and $5 million of gambling debts.

Shapiro was indicted, and he pled guilty to securities fraud and money laundering. He was sentenced to 20 years in prison and ordered to pay $82 million in restitution.

But while Shapiro was in prison, he tried to remain productive. He decided to attack the school where he had been an athletic booster, the University of Miami. Shapiro accused more than 70 of Miami’s athletes of breaking NCAA rules by accepting money, cars, and jewelry from him. There was an investigation, and it resulted in minor sanctions. After serving half his sentence Shapiro was released in 2020, just in time for a pandemic.

Takeaways

So what can we learn from this?

Shapiro worked hard to create the illusion of success. He made sure everyone saw he was a big-spender, and surrounded himself with wealth. And it worked; people saw Shapiro as a success. This led to the halo effect. Investors had a positive image of Shapiro personally, so they had a positive image of their investment in his company. Shapiro was good at gaining people’s confidence, which is why we call someone like him a “confidence man” or a “con artist.”

Turnaround?

Shapiro was just 51 years old when he was released from prison, so I wonder if we’ll see another scam from him. He’s been in or around trouble his whole life. In his twenties he picked up a felony assault charge for sucker punching someone at a nightclub, nearly blinding him. And Shapiro’s stepdad did time for a fraud of his own, as did Shapiro’s girlfriend/ business partner.

But people can change, and I really hope Shapiro’s done with fraud. Maybe he’ll try selling mattresses, or create a YouTube channel about people who fall in love with their cats. There are lots of legal ways to make money; I just hope he picks one. Only time will tell.

References

https://www.conklelaw.com/areas-of-practice/enforcing-rights-against-product-diversion
https://archive.fortune.com/2009/07/31/news/companies/product_diversion.fortune/index.htm
https://www.sec.gov/news/press/2010/2010-63.htm
https://www.sec.gov/litigation/complaints/2010/comp21495.pdf
https://archives.fbi.gov/archives/newark/press-releases/2011/ceo-of-capitol-investments-usa-inc.-sentenced-to-20-years-in-prison-for-930-million-ponzi-scheme-based-on-phony-grocery-business
https://sports.yahoo.com/convicted-ponzi-schemer-and-ex-miami-hurricanes-booster-nevin-shapiro-transferred-to-home-confinement-160124159.html
https://www.miaminewtimes.com/news/nevin-shapiro-miamis-caligula-6379018
https://www.espn.com/college-football/story/_/id/6866006/ponzi-schemer-nevin-shapiro-says-provided-benefits-miami-athletes
https://www.dkrpa.com/articles/the-psychology-of-investment-fraud/