January 9, 2014 — Investors should be able to trust investment firms to advise them in an ethical and responsible manner. When instead, investment firms knowingly mislead clients and intentionally misappropriate their investments, the fraudsters deserve to be reported to the whistleblower program instituted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010. Insiders who notify the U.S. Justice Department or Securities and Exchange Commission about phony stock loan schemes that cheat investors may be rewarded for collaborating with the government. Whistleblowers receive up to thirty percent of the amount recouped, provided the total is more than $1 million.
Fraudster Sentenced in $270 Million Fraud Scheme Involving Phony Stock Loan Scheme
William Dean Chapman, the owner of a Virginia investment firm, has been sentenced to a 144-month prison term for swindling over $35 million from his clients in a $270 million stock loan scheme. The Sterling, Virginia man founded and owned Alexander Capital Markets (ACM), which offered a financial product purportedly giving customers a fully hedged loan at an above-market interest rate against a customer’s securities.
In exchange for a customer’s shares in Ebay, for example, ACM would lend the customer cash worth 85 to 90 percent of the stock’s value. After a given time, ranging from two to seven years, the customer could choose to pay back the balance of the loan with accrued interest and take back the stock, or its equivalent cash value. Or, since the loans were non-recourse, the customer could elect to forfeit the securities at the close of the redemption period, having already been paid 85 to 90 percent of the stock’s value at the time the loan was made.
According to the Justice Department, ACM assured its customers that at the end of the contract period, ACM would be in a position to return the securities or their full cash value. But in truth, the company sold its customers’ stock as soon as it was transferred over, made the loan and then kept the proceeds for its own use and to compensate the people who marketed and sold ACM’s purported product.
his, of course, meant that no legitimate hedge existed, and at the end of the redemption period, ACM had no funds for customers who chose the return of their securities or the cash equivalent. Even when ACM was functionally insolvent, Chapman kept soliciting new customers, knowing that ACM would never have the means to follow through on his promises.
In seven years, Chapman reeled in over $270 million in stock, while 122 victims lost over $35 million in Chapman’s phony loan scam. Chapman put the money to his own personal use, acquiring a $3 million Virginia home and condominiums in Florida and in the Turks & Caicos, as well Italian sports cars, including a Ferrari and a Lamborghini.
Tipsters Alert SEC to Dishonest Stock Loan Schemes
Investment firm employees who uncover information about illegal stock loan schemes should take care to learn all they can about the Dodd-Frank whistleblower program before notifying the government. The SEC fraud lawyers at Waters & Kraus have the experience you need to back you up in whistleblower cases involving financial fraud. Contact us or call our whistleblower attorneys at 855.784.0268 to discuss how we can protect your interests.
