Nevin Shapiro billed himself as one of the largest grocery wholesalers in the U.S. Nevin Shapiro is now spending the next 20 years in a federal prison. What what wrong? For one, Shapiro raised almost $1 billion from investors but never sold groceries.

Shapiro was the former CEO and founder of Capitol Investments USA. Prosecutors say that he raised $930 million dollars from investors for his grocery business. Unfortunately for investors, Shapiro never bought and sold groceries. Instead, he kept raising money to finance his lavish lifestyle. He also used investor money  to pay off earlier investors who wanted to cash out.

Such behavior is evidence of a classic Ponzi scheme. As more and more investors go to cash out, there simply isn’t enough new money coming in to pay everyone. Ultimately the scheme collapses under its own weight. The earliest investors sometimes make out but the later investors invariably lose much or all of their money.

What is unusual about the Shapiro case is that most of the victims were incredibly sophisticated investors. This wasn’t some penny stock scam that survived from aggressive Internet advertising. Much like Bernie Madoff, Shapiro cultivated an image of privilege and power and played the ultimate con game with some incredibly wealthy people.

Shapiro used phony tax returns, phony invoices and fraudulent financial statements to show the profitability of his company and “document” tens of millions in annual sales. Investors were promised between 10% and 26% annual returns on their investments.

Where did all the money go? In addition to using some money to pay off early investors, Shapiro lived a lavish lifestyle according to prosecutors. Unfortunately for investors, Shapiro had a gambling problem and the FBI says millions was spent on illegal gambling and sports bets. Shapiro also used the money for his $27,000 per month mortgage payment, a yacht and $400,000 in floor seats for the Miami Heat.

Not being satisfied with simply stealing, he also donated money to the University of Miami in return for them naming a student lounge after him.

Shapiro was ultimately caught when he could no longer make payments to investors. In a Newark, New Jersey court room this week Shapiro was sentenced to 20 years in prison, 3 years more than requested by prosecutors. The judge compared Shapiro to a snake oil salesman and called the scheme an “extensive, massive, brazen fraud. Shapiro’s lawyer complained after sentencing that the judge was too harsh. It’s doubtful many people will agree.

Congress enacted the Unlawful Internet Gambling Enforcement Act in 2006 making it a federal crime for gambling businesses to accept payment in connection with unlawful Internet gambling. Despite the new federal legislation, the three largest online poker businesses doing business in the U.S. continued to allow U.S. residents to gamble on their sites.  The three companies, PokerStars, Full Tilt Poker and Absolute Poker, are all based offshore.

According to the indictments, the three companies used fake businesses to trick U.S. banks into processing their payments. In some instances they created hundreds of non-existent merchants solely to hide the transactions.

When that no longer worked, PokerStars and Full Tilt Poker “persuaded” SunFirst bank of Lake George, Utah to accept their money.  By “persuaded” I mean the online poker companies allegedly agreed to invest $10 million in the bank and give the bank’s vice-chairman a $20,000 finders fee. The parties involved have been charged with bank fraud and money laundering.

The government will soon start wading through reams of bank documents. Although the first waive of indictments are against officials from SunFirst and the three gaming companies, high stakes gamblers can expect the IRS will soon start sifting through the list of big winners.

Just how large is the problem? Millions of Americans play online poker according to estimates. Although the government is seeking both prison and $3 billion in forfeitures, experts say that is just the tip of the iceberg.

Said FBI Assistant Director Janice Fedarcyk, “The defendants bet the house that they could continue their scheme, and they lost.” Just how many lucky winners the IRS will soon catch remains to seen.

The IRS works on a “first contact” policy. If you contact them first and come into compliance, criminal prosecution is almost always averted. But if the IRS knocks on your door first, all bets are off.

What should you do if you have big winnings from online gaming? Contact a tax attorney immediately. CPA’s do not enjoy the same privilege as lawyers. If you have significant winnings that were not reported, see a lawyer. Anything you say to your accountant can unfortunately be used against you – the IRS can compel them to testify.

The government said the Cantens owned a Miami real estate development company called Royal West Properties.  Prosecutors say that the Cantens and Royal West sold promissory notes promising 9 to 16% rates of return. Many of the people investing in the notes were Cuban exiles living in southern Florida.

While raising $135 million dollars, the Castens would tell investors that their investment was safe and backed by recorded mortgages. In fact, the company had been hemorrhaging money since 2002. Royal West needed new investors simply to cash out those earlier investors who wanted to cash in their notes.  But that’s not all they did.

Prosecutors say that the Cantens diverted over $20 million to themselves through ridiculous salaries and personal expenses. This included payments of $1 million to their kids and grandkids as consulting fees even though none of them performed any services.

As is typical in affinity fraud cases, the Gastens touted their ties to the Cuban community and the Catholic church. According to the federal complaint, “The Cantens cultivated an image of a pious couple who were very involved in the community and with whom it was a privilege to invest.”

Unfortunately many of the investors (victims) were elderly and turned over their life savings to the couple.

Even a little due diligence would have uncovered the fraud. Royal West was “paying” investors a higher rate of return than it was charging borrowers who were purchasing real estate from the company. In other words, it was a mathematical impossibility that the loans being made the company could generate the required rate of return needed to pay investors.

Even after the company defaulted on its promissory notes Teresita and Gaston continued to solicit new investors and lie about their profitability.

Once again, investors will likely never see all their money. Some of the 400 investors will likely die before any of the money is collected and distributed.

It is unknown whether any investors purchased their promissory note through a broker or financial planner. Those investors may have the ability to bring their own separate action against the person or company soliciting their investment.