Feds Say That Failed Stock Loans Required Capital Gains Payments

June 17, 2011

HedgeLender LLC apparently had this idea - frankly, it sounds wonderful but for the fact that the Feds seem to characterize it as a "scheme." Oh well, those government types are such party poopers.

Anyway, here's the HedgeLender program: The company allowed owners of stock with untapped profits to cash out through a loan.  Even better, HedgeLender, with offices in Philadelphia, PA and Reston, VA,  said that the loans did not need to be reported to any taxing authority and no capital gains taxes would be owed.

Avoid Capital Gains!

Wow!  Just imagine. I buy XYZ for $10 and it goes up to $20 and someone loans me money using a very sophisticated program 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 thet 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 government 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 merely a true 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 U.S. Securities and Exchange Commission sued two of its owners, who agreed to stop promoting a similar stock-loan product, HedgeLender stayed the course.

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