The Securities and Exchange Commission on Thursday charged Woodbridge Group and its owner, real estate developer Robert Shapiro, with operating what amounted to a $1.2 billion Ponzi scheme. The SEC has frozen Shapiro’s assets amid one of the larger and last Ponzi schemes of late, saying the “business model was a sham” and putting a freeze on the high-flying fund manager’s business activities.
Woodbridge Group advertised they made "hard money" loans, but many of those loans allegedly went to the Shapiro related firms that had not revenues and did not pay
The mighty have fallen hard.
It was a little over a year ago that Shapiro and Mercer Vine, a Los Angeles residential brokerage allegedly operated by Shapiro and Woodbridge Group , had purchased the $90 million Owlwood estate once owned by entertainers Sonny Bono and Cher Sarkisian. They would later list the Holmby Hills property for $180 million, making it one of the most expensive real estate listings in the country. The property remains unsold.
Local Los Angeles real estate brokers were unconvinced. “When I first heard about them they were the cool new kids on the block,” one real estate executive told Los Angeles Real Estate News. “But I figured they were established for Woodbridge so Woodbridge wouldn’t have to pay crazy commissions for someone else and they would just hire their own guys.”
The hunches turned out to be accurate.
What the business transaction really shows is how Shapiro, through a web of related companies, created what regulators are charging have been “a web of layered companies to conceal his ownership interest in the purported third-party borrowers,” according to Eric I. Bustillo, Director of the SEC’s Miami Regional Office.
Woodbridge Group promoted its primary business as one issuing loans to third-party commercial property owners who would pay Woodbridge 11-15% annual interest for “hard money,” short-term financing, the SEC complaint alleged. In return, Woodbridge promised to pay investors 5% to 10% percent annual interest in what was being promoted as a “low risk” and “conservative” investment.
The problem for investors is that the loans were going to related companies of Shapiro, many of which had little revenue to pay them back. “The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money,” Steven Peikin, Co-Director of the SEC’s Enforcement Division, said.
Woodbridge Group paid $64.5 million in commissions selling what the SEC says is a Ponzi scheme
Woodbridge Group used an expensive marketing system to sell the investments to individual investors, many of them seniors, paying $64.5 million in commissions but also splurging on personal expenses. Shapiro, who lived in Sherman Oaks, California, allegedly diverted at least $21 million for his own benefit, paying to private jets, country club fees and purchasing luxury vehicles and jewelry.
“Woodbridge and Shapiro swindled seniors into a business model built on lies,” Stephanie Avakian, Co-Director of the SEC’s Enforcement Division, said in a statement.
Rather than make highly profitable loans, what actually occurred was Shapiro was using funds from new investors to pay investors that were pulling their money. Despite claims that Woodbridge had a 90% investor renewal rate, problems arose when investors began to withdraw their money.
“The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money,” Steven Peikin, Co-Director of the SEC’s Enforcement Division. The walls of the Ponzi scheme started crashing down. When existing investors were no longer getting paid, Woodbridge declared bankruptcy on December 1 and sought to restructure $750 million of debt while attempting to take out a $100 million loan against the Owlwood property.
There are few funds of this size that are outright (alleged) ponzi schemes left, according to fraud experts familiar with the matter, so do not expect to see scams of this size getting busted by the SEC anytime soon.
Regulators had been investigating Woodbridge Group , which was formerly headquartered in Boca Raton, FL (cough, cough....), in 2016, according to Reuters. The companies Shapiro operated were “a group of unregistered investment companies, the SEC noted in a statement. The scheme is said to have bilked 8,400 investors, according to the SEC.