Scam of the day – December 11, 2013 – William Dean Chapman scams congressman and others

William Dean Chapman, the founder and owner of Alexander Capital Markets has just been sentenced to twelve years in prison for an investment scam that stole 36 million dollars from 122 investors including Florida Congressman Alan Grayson.  According to the SEC, Chapman and his company “raised money by inducing borrowers to transfer ownership of millions of shares of publicly traded securities to them as collateral for purported non-recourse loans based on false promises, including the promise to return the shares, or remit share profits in excess of accrued interest, to borrowers who repaid their loans.”  Generally what Chapman and his company would do is loan money to the victims in an amount of between 85% and 90% of the value of the stock that was transferred to Chapman with the understanding that after about three years, the stock would be returned to the customer if the loan was paid with interest.  Instead, Chapman sold the stocks upon receiving them and used the proceeds to provide the money loaned to the victim.  Chapman then kept the rest of the sales proceeds for his own use.  Thus there was nothing left to pay the customers back at the end of the three years.

TIPS

One of the first rules of investing in order to protect yourself from being scammed is to make sure that you never invest in something that you do not understand.  This particular type of a hedging transaction, if done properly is legal, but certainly complicated and should only have been considered by extremely sophisticated investors.  However, where sophisticated investors such as Congressman Grayson, who indeed has been proven to be a knowledgeable investor made a mistake is in providing the stocks to Chapman and his company where they were both the entity that made the loans and held the securities.  One way of avoiding this type of scam is to insist on a separate broker-dealer holding the stocks in order to provide a greater level of safety and avoid both the temptation and the ability to pull off this kind of scam.  If an independent broker-dealer had held the stocks, this type of scam would have been impossible to pull off by Chapman.