A Sterling, Va., financial advisor has been sentenced to 12 years in prison for orchestrating a $270 million stock loan scheme that cost clients $35 million, the U.S. Attorney for the Eastern District of Virginia announced Friday.
William Dean Chapman, 44, founder and owner of Alexander Capital Markets (ACM), pled guilty in May to one count of wire fraud. According to the Associated Press, Chapman's biggest victim was Democratic Florida Rep. Alan Grayson, who lost $18 million. Chapman's attorney said it was Grayson's stock-picking prowess that caused the scam to unravel.
ACM’s primary business was offering a financial product that provided customers with a supposedly fully hedged loan at an above-market rate of interest against a customer’s securities. The securities served as collateral for a loan of 85 to 90 percent of the securities’ value, the U.S. attorney said.
For example, in exchange for a customer’s stock, ACM would provide a cash loan to that customer worth 85 percent or 90 percent of the stock’s value. After a period of time, usually three years, the stock would be returned to the customer if the loan, plus interest, was repaid. ACM was registered with the SEC as an advisory firm and Chapman as an investment advisor representative from June 2003 through December 2007.
ACM’s customers were assured that ACM was engaged in hedging transactions so that ACM would be able to return the securities, or the cash equivalent, at the end of the contract period. In reality, ACM simply sold the securities upon receipt, remitted up to 90 percent of the sales proceeds to its customers as the loan, and retained the remaining sales proceeds for itself or those marketing the product, the U.S. attorney said.
The Associated Press reported that in 2007, Chapman was holding $9.35 million in Grayson's investments alone, including stocks and commodities. According to court documents, the portion of Grayson's portfolio that was collateralized at ACM appreciated 147 percent in value that year to $23 million.
Grayson's identity was supposed to be protected in the case and he was referred to as A.G. "Because the return on A.G.'s commodities investments were so astronomical, ACM could not meet its obligations under the loan agreement," Chapman's lawyer, Whitney Mintner, wrote in court documents.
Grayson challenged Mintner's version of events, telling the AP that ACM's plan would have worked if Chapman hadn't sold his stocks but continued to hold them as collateral as he had promised.
Although ACM was insolvent by 2008, Chapman continued to solicit new customers knowing that ACM would never be able to fulfill its financial obligations. The U.S. attorney said that over a period of seven years, Chapman took in more than $270 million in stock from 122 victims but was unable to repay $35 million of it.
At the same time that ACM was amassing liabilities and failing to repay its clients, Chapman used his clients’ money to support a lavish lifestyle by purchasing a custom-built $3 million home in Great Falls, Va., condominiums in Florida and in the Turks and Caicos, and a Lamborghini and Ferrari, the U.S. attorney said.