The U.S. Securities and Exchange Commission (SEC) announced Monday that a federal court in Florida had ordered Woodbridge Group of Companies LLC to pay $1 billion in penalties and disgorgement for operating a Ponzi scheme that targeted retail investors.
Penalties are fines paid to the governing authorities, but disgorgements are court-ordered repayments of ill-gotten gains to the parties that have been defrauded.
A Massive Disgorgement and Crushing Penalties
In this case, the Woodbridge Group of Companies LLC and its 281 associated companies, have been ordered by U.S. District Court Judge Marcia G. Cooke to pay $892 million in disgorgement to defrauded retail investors.
Woodbridge Group's former owner and CEO, Robert H. Shapiro, was also ordered to disgorge $18.5 million plus interest in ill-gotten gains, and the judge threw the book at Mr. Shapiro with a stiff $100 million civil penalty.
The ruling comes a little over a year after the SEC took action against Woodbridge Group and Robert Shapiro with an emergency filing in December 2017, charging the company with operating a $1.2 billion Ponzi scheme to defraud 8,400 retail investors, many of them seniors investing their retirement savings.
The Woodbridge Group Ponzi Scheme
The SEC argued Shapiro's business was a classic Ponzi scheme:
"We allege that through aggressive tactics, Woodbridge and Shapiro swindled seniors into a business model built on lies, which the SEC’s Miami Regional Office staff moved to halt,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division.
“Our complaint alleges that Woodbridge’s business model was a sham,” said Steven Peikin, co-director of the SEC’s Enforcement Division
The only way Woodbridge was able to pay investors their dividends and interest payments was through the constant infusion of new investor money.
The Striking Similarities to Big Finance
Today's big SEC win is extraordinarily ironic.
How is the U.S. equities market any different from a Ponzi scheme in this respect? As UBS CEO Sergio Ermotti said in Davos last week, the only way many financiers trading equities are able to pay investors is through the constant infusion of new investor money from the Federal Reserve.
A Ponzi scheme is a kind of business scam in which profits aren't generated by using capital to bring a good to market, but by bringing in more investors and using their money to pay off the first round of investors, then bringing in more investors and using their money to pay off the last round.
Maybe Woodbridge Group's biggest mistake was not defrauding even more investors out of even more money.
A year ago the SEC called the Woodbridge Group a billion dollar Ponzi scheme. If it had been just a little bigger, like the Wall Street banks that crashed and burned in 2007 and 2008, it would have been "too big to fail."
Then instead of regulatory action precipitating a $1 billion settlement of court-ordered restitution and fines, they could have received a legislative bailout package courtesy of the U.S. taxpayer.
Quest Capital Strategies Inc. to Disgorge $276,000
The same day the SEC announced the federal district court's $1 billion judgment against Woodbridge Group, Quest Capital Strategies was ordered to disgorge $276,000 to an investor that lost money on Woodbridge securities sold by a Quest-affiliated broker.
An arbitration panel of the Financial Industry Regulatory Authority Inc. (the financial industry's self-regulatory NGO that was once chaired by none other than Ponzi extraordinaire Bernie Madoff himself) ordered Quest Capital to disgorge over a quarter million in ill-gotten earnings to the investor.
FINRA says that Quest should have more closely supervised Frank R. Dietrich, the broker who sold the investor (a retired Coast Guard veteran living in Virginia) $400,000 in Woodbridge mortgage notes over a meeting and a free $100 Olive Garden gift card.
Read the final judgment against Woodbridge below:
Woodbridge Judgment by on Scribd
Featured Image from Shutterstock
Last modified (UTC): January 28, 2019 4:11 PM