Miami Law Firm To Pay $5 Million To Settle Ponzi Lawsuit

A prominent Miami law firm has agreed to pay $5 million to settle claims it played a pivotal role in "aiding and abetting" the massive $930 million Ponzi scheme operated by notorious fraudster Nevin Shapiro.  Shook, Hardy & Bacon ("SHB") reached the settlement with the court-appointed bankruptcy trustee, Joel Tabas, during a mediation last week.  The settlement, which is subject to approval by U.S. Bankruptcy Judge Laurel M. Isicoff, brings the total amount recovered for Shapiro's victims to $40 million - of which $13 million has been returned to victims.  

Shapiro was a Miami businessman who raised nearly $1 billion from investors through his grocery brokerage business, Capitol Investments, which Shapiro touted as a highly-profitable grocery wholesaling business.  Shapiro told investors Capitol Investments was a highly-profitable grocery diverter - a business that purchased low-priced food in one region and re-sold the goods for a profit elsewhere.  Shapiro used investor funds for a variety of unauthorized purposes, including Ponzi-style payments to existing investors and the diversion of tens of millions of dollars to sustain a lavish lifestyle that included a $5 million house, floor seats to Miami Heat basketball games, and numerous contributions to the University of Miami's athletic program.  Shapiro later attracted national attention when he disclosed he had provided illegal gifts to dozens of current and former college athletes at the University of Miami.  

One of Shapiro's high-school friends, Marc Levinson, had become an attorney at SHB and remained close with Shapiro.  Beginning in 2003, SHB and Levinson began handling Shapiro's legal affairs, including his dealings with investors in Capitol Investments.  According to Tabas, the firm "aided and abetted" Shapiro's violation of numerous federal securities laws, even after an internal memo circulated by the firm in December 2006 concluded that Shapiro was likely violating federal securities laws.  Despite these warning signs, Shapiro continued to operate his scheme for several years until his arrest in April 2010.  Shapiro would later plead guilty to securities fraud and was sentenced to a twenty-year prison term in June 2011.  

The settlement is the latest in what has become an increasing effort to hold law firms liable for either assisting or failing to detect a client's Ponzi scheme.  While none of the recently-filed lawsuits have proceeded to trial, several notable settlements involving law firms include a $25 million settlement by Holland and Knight for their role in Arthur Nadel's $330 million Ponzi scheme, as well as a $77.5 million settement by Greenberg Traurig and Quarles & Brady in the $900 million Mortgages Ltd. Ponzi scheme.

Of note, Tabas is compensated for his work as trustee under a contingency arrangement - a rarity in Ponzi scheme jurisprudence.  Whereas typically court-appointed receivers and bankruptcy trustees are compensated at an (often discounted) hourly rate for their work in recovering funds for victims, Tabas's arrangement allows his legal team to retain approximately 33% of his recoveries.  While the exact reason is unclear, the general use of a contingency arrangement can reflect a variety of factors, including the difficulty or uncertainty of prevailing.  Thus, under Tabas's arrangement, the $40 million recovered thus far will yield attorney's fees of more than $13 million.  

A copy of the SHB Lawsuit is here