HedgeLender Defendant Chapman Gets 144 Months In Prison

December 12, 2013

HedgeLender LLC apparently had this idea - frankly, it sounds wonderful but for the fact that the Feds seem to characterize it as a "scheme" and a crime. I mean, geez, what's not to like about a transaction that transforms your capital gains into non-taxable loans? Oh well, those government types are such party poopers.

A Capital Idea: a loan

You got some stock with unrealized profits but you don't want to sell the shares and get hit with capital gains tax. What's an investor flush with unrealized profit to do when he or she is allergic to paying tax?

You could have gotten in touch with HedgeLender, which magically transformed your untapped profits into, voila, a loan. And what collateralized this loan? Why the very shares that you are trying to ring some profit out of, albeit without paying tax. A loan that HedgeLender asserted avoided the recognition of profit for capital gains purposes. A loan that supposedly didn't need to get reported to any taxing authority.

Wow! Just imagine. I buy XYZ for $10 and it goes up to $20 and someone loans me money in a way that allows me to realize my $10 profit without having to pay a penny's worth of tax. Even better, my un-sold stock will serve as the collateral for the loan. Sign me up!!

Plan or Scam?

Unfortunately, on June 16, 2011, the Justice Department announced that the U.S. District Court for the Eastern District of Virginia entered a permanent injunction against HedgeLender LLC that barred the company from promoting a stock-loan tax scheme. The Complaint against HedgeLender also named two alleged owners of HedgeLender, Daniel Stafford and Fred R. Wahler, Jr., as well as William Chapman and two companies he allegedly owned, Alexander Capital Markets LLC and Alexander Financial LLC. All five of those defendants previously agreed to permanent injunctions without admitting the allegations in the complaint.

It seems that the Court found that HedgeLender knowingly made false statements when it characterized its tax-avoidance program as a loan secured by the customer's stock. Apparently, the Court was troubled by the fact that the subject stock was sold immediately and the proceeds of that sale were then paid to the customer. This nuance sort of killed the whole idea that the customers were getting "loans," and really made the transaction look like little else than the payment of capital gains, which are subject to federal taxes.

Still, I gotta hand it to HedgeLender. Before the feds turned off the lights on this party, the defendant engaged in sales of more than $268 million in securities . The other brassy aspect of this deal was that even after the Securities and Exchange Commission sued two of its owners, who agreed to stop promoting a similar stock-loan product, HedgeLender stayed the course.

Also see:

UPDATE

Chapman was the founder and owner of Alexander Capital Markets ("ACM"), whose primary business was structuring a fully hedged loan at an above-market rate of interest against a customer's securities. In exchange for a customer's stock, ACM might extend a cash loan to that customer worth 85 or 90% of the stock's value.

After the expiration of the term of the loan (which ran between two and seven years; typically three years) and subject to repayment of principal with accrued interest, the customer could reacquire their securities or receive the equivalent cash value. On the other hand, the customer also had the option of simply walking away with the loan proceeds in lieu of re-acquisition of the pledged shares or payment of their present market value.

The 10% Solution

In reality, ACM simply sold the securities upon receipt, remitted up to 90 percent of the sales proceeds to its customers as a purported loan, and retained the remaining sales proceeds for itself and the parties who sold, marketed or facilitated the product. So, sure - the customers got a whopping percentage of the present value of their shares; and, you might ask, what's the harm? A lousy 10%? Big deal, that's sorta like a haircut or a modest finder's fee. Gimme my 90% tax free and keep the tip.

All well and fine, except what was structured as a "loan" turned into a "sale" (which had negative capital gains tax consequences). Moreover, if there were any appreciation in the price of the purportedly collateralizing shares, that was all lost because those securities had been sold.

So what happened with the misbegotten profits? Turns out that Chapman purchased a custom-built $3 million home in Great Falls, Va.; condominiums in the Turks & Caicos and Pompano Beach, Fla.; and a Lamborghini and Ferrari. Unfortunately, on the heels of that spending spree, by April 2008, ACM was functionally insolvent, although the Feds alleged that Chapman continued to solicit new customers. Apparently, when all was said and done, Chapman managed to steal about $35 million for himself.

On May 23, 2013, Chapman, 44, pleaded guilty to one count of wire fraud. On December 6, 2013, he was sentenced to 144 months in prison and ordered to undertake $34 million in restitution.

READ the following full-text source documents:

Bill Singer's Comment

Wow, ya gotta hand it to Chapman -- could you have come up with a simpler scam? He's taking your stock, selling it behind your back, giving you 90% of its value, and then simply pocketing the other 10%.

One of the more comical (unintended, as it were) aspects of this case is found in the Sentencing Minutes. There you will find that Chapman has been ordered to immediately repay $34 million in restitution. Further down the Sentencing Minutes, under the "Special Conditions" heading, you will note that the Court ordered the restitution as follows:

Dft. must pay restitution in monthly install, of $150 up to 25% of net income to begin 60 days after release

Ooooooooookay, so let's do the quick math. Ya got yer $34 million restitution. Ya got the court order of repayment at the minimal rate of $150 a month. So, we divide $34 million by $150 and get 226,666.67 monthly payments. Then we divide that by 12 and come out with 18,888.89 years to fully repay the restitution. Ahhh, the sweet smell of justice! Say . . . what the hell is that stink?

Also READ:

Permalink