One of the wealthiest members of Congress was the most prominent victim of a stock fraud that blew up, sending its perpetrator to jail.
Rep. Alan Grayson, D-Fla., lost $18 million in a scheme conducted by William Dean Chapman of Sterling, Va., who offered loans to customers who used their stocks as collateral. Mr. Chapman, who was sentenced to 12 years in prison last week, defrauded his clients of $35 million in an operation that totaled $270 million.
The fact that Mr. Grayson was ripped off shows that it isn't just retirees and mom-and-pop investors who get cleaned out by fraudsters, according to a spokesman for state regulators.
“If Alan Grayson can fall victim to a scheme, anyone can,” said Bob Webster, director of communications at the North American Securities Administrators Association. “Wealth does not protect you against financial fraud.”
Mr. Grayson first invested money with Mr. Chapman in 2003, before he was elected to Congress.
Mr. Chapman was supposed to hold onto Mr. Grayson's stock and return it, along with any gains, when the congressman's loan matured.
But Mr. Chapman sold Mr. Grayson's stock without the congressman's permission, and he wasn't able to repay him, according to Lauren Doney, the congressman's spokeswoman.
Mr. Chapman's attorney Pleasant Sanford Brodnax III of the Law Office of Pleasant Brodnax III didn't return a phone call seeking comment. His loss was first reported by the Associated Press.
Prosecutors accused Mr. Chapman, the owner of Alexander Capital Markets, of selling 122 clients' stock collateral rather than engaging in legitimate hedging.
Over time, the fund was unable to return stocks or cash when loans came due, and the company became insolvent in April 2008. Nonetheless, Mr. Chapman continued to make loans, using the proceeds to pay other borrowers and operating costs. In addition, he used some of the money for personal purchases, such as a $3 million home in the Virginia suburbs of Washington, condominiums in Florida and the Caribbean, and Lamborghini and Ferrari sports cars.
The downfall of Mr. Chapman's fund started when Mr. Grayson's stock achieved remarkable performance, according to court documents.
Mr. Chapman contributed $3.8 million to the fund, but it wasn't enough to keep up with Mr. Grayson, whose return on equity for his securities in 2007 was 1,372%, according to a court document.
“The monies owed to one spectacularly successful investor, A.G., ACM's inability to obtain further capital beyond Chapman's $3.8 million, and, most importantly, Mr. Chapman's lack of complete transparency with borrowers after 2008 provide context to the fraud committed by Mr. Chapman,” a court document states.
In other documents, court officials identified “A.G.” as Mr. Grayson.
Mr.Chapman initially sought to do business with Mr. Grayson because he brought big assets to the table.
Mr. Grayson is the 21st wealthiest member of Congress and has a net worth of $16.69 million, according to a survey by the publication Roll Call.
“Chapman saw the relationship as an amazing opportunity because the deals with A.G. were so large,” a court document states.
Although Mr. Grayson knows how to pick stocks, he chose poorly in selecting the person with whom to do business.
“Here's someone who has financial acumen, knows what he's doing and still stumbled into a scheme,” Mr. Webster said. “You never know when you're going to run up against someone who's out to do harm.”