In the most recent one, Grayson lost $18 million on deals with Virginia businessman William Dean Chapman, who this month was sentenced to 12 years in prison after pleading guilty to defrauding Grayson and 121 others out of lucrative stocks.
After the two men met a decade ago, Chapman’s lifestyle turned lavish. He built a $3 million mansion in Great Falls, bought a condominium in Turks & Caicos, another in Fort Lauderdale, Fla., a Lamborghini, a Ferrari — and traveled the world, federal prosecutors said.
Chapman could not be reached for comment, but his own lawyer said in a court filing that the deals Grayson brought him were “so large” that Chapman viewed the relationship “as an amazing opportunity.”
Ultimately, both men lost big.
“I was horrified,” said Grayson, who entered into the deals starting in 2003, before he joined Congress. “I had given him millions of dollars worth of stock.”
Using collateral for a loan is a concept that dates back decades. And even putting up stock for cash, as Grayson did, is a well-established practice. But the system used by Chapman and one other firm offered a different twist and tripped up borrowers, triggering lawsuits and enforcement actions by federal and state authorities.
Chapman ensnared not just wealthy investors like Grayson, but also the less savvy: a retired grocery store manager and his wife who lost $8,000, a single woman who earns $35,000 annually working 40-hour weeks, and a 73-year old who said she “did without” to save for retirement and then lost it all, according to a court document.
“This is not a case where only faceless financial institutions lost money,” Justice Department prosecutors said in a court document. “The defendant stole from real people, who now must work harder and longer (if they can) because the defendant cheated them of their savings.”
Chapman’s firm, Alexander Capital Markets in Reston, found clients through stock brokers, insurance agents and other middlemen. The offer was tantalizing: Free up cash using the stock you own — but without letting go of the shares.
ACM would provide loans equal to 90 percent of the value of a person’s stock. When the loans matured, typically three years later, clients could walk away if the share price had dropped. Chapman said he would “hedge” the stock, in other words, make investments that would mitigate his risks for holding onto it, court records show.
If the stock’s value climbed, clients were told they could repay the loan with interest and reclaim the stock, or get its cash equivalent.
But in almost every case, Chapman immediately sold the shares and used the money to pay off other client loans, prosecutors said. He would also pay himself and the middlemen. As with many Ponzi-like schemes, there came a point when Chapman didn’t have enough cash to make good on his obligations, and 122 people lost about $35 million total.
Carol Montana said her 87-year-old father fell victim to the scam.
For four decades, he’d held onto Exxon stock that once belonged to his father, Montana said. But as he grew older, he worried about his wife’s financial security should he pass away. An insurance agent pointed him to ACM, she said.
As part of the deal, her father transferred his 39,000 Exxon shares to ACM in exchange for a $1.4 million loan, according to court documents. He used that loan to buy a life insurance policy in 2003, and he died four years later, Montana said. When the loan matured in 2008, the family wanted the stock back. Her father’s trust paid off the loan with interest — totaling $1,950,052.
But Chapman had sold the shares.
Even so, he took their money and used $50,000 of it for personal expenses, putting $15,000 toward his Turks & Caicos condo, prosecutors said. He transferred another $25,000 to his personal bank account, and used a chunk of that to pay the monthly mortgage on his Great Falls mansion.
He also bought new shares of Exxon Mobil, which he gave to Montana’s family. But 16,000 shares, worth about $1.3 million, were never returned. Montana’s mother, who suffered from Alzheimers, died this month.
“That money would have helped care for her,” Montana said. “My father was a naval officer who served in World War II. He was an honorable man, and he was trying to take care of his wife.”
Robert Peyser, 69, lost $600,000 worth of stock in the ACM scam. But he faces even bigger headaches. Peyser said the Internal Revenue Service is now after him.
The IRS views Peyser’s deal with ACM as a stock sale, not a loan, and it is demanding $800,000 in capital gains, with interest and penalties included, said Peyser, an executive recruiter in Florida. The episode has “shaved years off my life,” he said.
When Peyser’s financial adviser recommended ACM, Peyser said he asked for referrals, and he called them all, including Grayson. “Nobody raised red flags,” he said.
Cash to invest
Grayson, an avid stock picker, said he entered into more than a dozen transactions with ACM starting in 2003. By then, Grayson had plenty of cash to invest.
Seven years earlier, the telecom firm he co-founded, IDT Corp., went public. He had at least 400,000 shares in the firm worth about $4 million, and he used his new-found riches to invest in more stock and make even more money, he said.
Grayson, who grew up in public housing in the Bronx and worked his way through college as night watchman and a janitor, now ranks 21st among the wealthiest members of Congress, according to Roll Call, a Capitol Hill newspaper that reviews the financial disclosure reports filed by lawmakers each year. His net worth: at least $16.7 million, in part due to the value of his stock portfolio.
In other words, Grayson was not new to investing when he heard of Chapman through a third party. Grayson was a trial lawyer with his own firm in Virginia back then. He contacted Chapman, and the two met for lunch. They spoke for hours. “I concluded he had enough financial sophistication to do what he said he was doing,” Grayson said.
What Chapman offered was a variation of a well-known arrangement that’s available to institutional investors and wealthy individuals working with stock brokerage firms and banks. But those institutions used to loan only about 50 percent of the stocks’ value, far less than the 90 percent Chapman offered. And they operated under different terms.
For instance, if the stock price fell below a certain threshold, these institutions would go after their clients for the difference. Chapman would let clients walk away. If the stock price rose, clients could cash out at any time, whereas Chapman locked his customers into multi-year deals.
Grayson said Chapman made good on some loans over the years.
But when others matured in 2007, and Grayson wanted his stock back, Chapman could not deliver. That was the beginning of the end.
Grayson’s return on his stocks that year shot up 1,372 percent, “an astronomical number by any measure,” Pleasant Brodnax, one of Chapman’s attorneys, wrote in a court filing.
Chapman owed Grayson $3.5 million by July 2007, an FBI agent investigating the case said in an affidavit. The debt ballooned to $10.6 million by year’s end. The liabilities owed to Grayson alone “exceeded the amount of cash ACM had on hand,” the agent said.
By 2008, Chapman was on the hook for $18 million worth of Grayson’s stock. ACM was “functionally insolvent” by then, yet it kept taking on new clients, prosecutors said.
Another stock for cash firm
Those losses added to the ones Grayson suffered after doing business with Derivium Capital, another stock for cash firm that is now in bankruptcy. Grayson said he was cheated out of more than $30 million by that firm, and he’s recouped only a fraction of it through bankruptcy proceedings, lawsuits and court settlements, he said.
The congressman said he took out loans from Derivium and ACM around the same time, and Derivium unraveled faster. Efforts to reach the company’s attorneys were unsuccessful. But the losses apparently did not deal a huge blow to his bottom line. In his financial disclosures, Grayson reported having $30 million to $75 million in cash in 2010 — the year after ACM imploded.
“I lost a lot of fish, but I still know how to fish,” said Grayson, who said all would be well if only Chapman had kept his promises. “I don’t want to sound like this means nothing to me. I feel very sad about it. But being a prudent and responsible person, I never thought I should take every last nickel I had and throw it at ACM.”
Grayson, the liberal firebrand who once derided a GOP health-care proposal as the “die quickly” plan, was philosophical about the monetary loss. “I am really blessed, and I think it would be so wrong for me as a person to be so belligerent over money,” he said.
Chapman, 44, pleaded guilty to one count of wire fraud in May. He has filed a notice of appeal.
When U.S. District Judge Gerald Bruce Lee in Alexandria sentenced him this month, Chapman was ordered to repay the victims in full at the rate of $150 a month or up to 25 percent of his net income, whichever is greater, starting 60 days after his release from prison.
Before his sentencing, Chapman’s family pleaded for leniency. In a letter to the court, his wife, Lisa, said that when ACM’s financial troubles deepened, Chapman sold everything they had and “put every penny” back into the company. “We lost our main home, moved into a rental and eventually went on welfare,” she wrote.
As the sentencing day neared, Chapman had a change of heart. He tried to withdraw his guilty plea, arguing in part that he felt pressured because the prosecution threatened to indict his wife on unrelated charges. His wife, a long-time stay-at-home mom, had started working at a bank and become the family’s breadwinner, he said.
“My wife felt that taking the plea was the only alternative that protected the family and that I was not a ‘noble guy’ if I would not take the hit to keep them safe,” Chapman said.
The judge rejected the request, and prosecutors have denied having threatened his wife.
The court also rejected Chapman’s request for prison term of no more than six years. And it did not allow him to “self-surrender” to the Bureau of Prisons, which would have allowed him to go home before his sentence began.
Chapman was led out of the courtroom by deputies and locked up on the spot.
— Staff Researchers Alice Crites and Magda Jean Louis contributed to this article.