U.S. Rep. Alan Grayson, known on Capitol Hill for aggressively questioning key players in the nation?s financial crisis, has suffered a ?financial disaster? of his own, he confirmed to Local 6.
Grayson, D-Orlando, fell victim to a billion-dollar Ponzi scheme operated by Derivium Capital, a South Carolina firm that a federal jury ruled in February defrauded Grayson of $34 million -- an amount equal to more than half of Grayson?s 2008 net worth.
?It was very much like the Bernie Madoff situation,? said Grayson, who?s had Madoff?s Ponzi scheme in his crosshairs from his seat on the House Financial Services Committee.
In February, Grayson?s Washington office issued a press release criticizing Madoff?s ?penthouse arrest,? calling for the swindler to be jailed while awaiting sentencing.
And in video played thousands of times on You Tube, Grayson on Feb. 4 facetiously asked a financial expert who tried in vain to warn regulators about Madoff?s scheme: ?You referred to this several times as a Ponzi scheme. Is that some newfangled thing??
Of course, Grayson knew better: at the exact time he spoke on Capitol Hill, his lawyers were in a South Carolina courtroom arguing he was a victim of just such a scheme.
?What happened to the victims in Madoff is the same thing that happened to me,? Grayson told Local 6 in an interview Monday. ?I lost millions of dollars.?
Scam's Most Frequent Customer
Between 2000 and 2005, Grayson was the most frequent participant in Derivium?s ?90-percent stock-loan? program, transferring about $29 million in stocks to Derivium and promptly receiving 90 percent of it ? about $26 million ? back in cash as ?stock loans,? according to his court filings.
So Grayson spent only about $3 million out of pocket. When you include the nearly $600,000 he received back from stock loan proceeds, his net cash loss is about $2.4 million, according to court records.
But Derivium had promised to pay Grayson profits on his stocks, if they appreciated enough over the three-year loan period to cover the amount of his ?stock loans? plus interest. And Grayson picked some lucrative stocks. His $34 million in damages is based on the profits he should have received on stocks that rose in value ? had Derivium not run out of cash and filed for bankruptcy.
In all, about 800 clients provided about $1 billion in stocks they owned in various companies to Derivium Capital and its associates. The firm claimed their clients did not have to pay capital gains taxes on the transfers of stock.
But the Internal Revenue Service has another opinion, alleging Derivium was an illegal tax evasion scheme used by some of its wealthy clients to evade paying an estimated $235 million in income taxes.
Grayson said he is not one of those clients accused of tax evasion. ?The difference is they broke the law and I didn?t,? he said.
A review of public court documents by Local 6 found no evidence Grayson is accused or suspected of any wrongdoing.
Unlike those Derivium clients who evaded capital gains taxes through their stock loans, Grayson did not hold the vast majority of his stocks long enough to accrue any significant taxable capital gains, according to Grayson, court records and interviews with sources familiar with the case.
?I took these loans in order to make money,? Grayson told Local 6. ?My taxes were reported accurately year after year without any question.? If anything, he said, ?the scheme made my taxes higher rather than lower,? because of losses he incurred.
Fraud, Tax Scheme?Or Both?
In February 2007, Grayson filed a fraud and racketeering lawsuit against Derivium Capital and its associates in federal court in South Carolina. After a nearly month-long trial, on Feb. 26, 2009, a jury returned a $270 million verdict in favor of Grayson, several other former Derivium clients and a bankruptcy trustee. Grayson?s damages were set at $34 million.
?The judge and the jury could not have reached a more favorable conclusion from our point of view. They literally gave us every single penny we asked for,? Grayson said.
The South Carolina jury found Grayson and the others were victims of fraud and racketeering.
At the same time, across the country, the federal government was calling Derivium a tax-fraud scheme.
In a lawsuit filed in San Francisco in September 2007 against Derivium and its associates, the government claims Derivium illegally helped some of its wealthy clients evade nearly $235 million in capital gains taxes.
In a February 2009 hearing, a U.S. Justice Department tax attorney told a federal magistrate he believes all of the 270 Derivium clients audited so far by the IRS were found to have used the loans as an abusive tax shelter. He did not identify in court any of those audited, nor would he comment to Local 6 about the investigation.