Wednesday, November 20, 2013

Fraud: Taking Stock - Corporate Execs Get Scammed

Source: FBI

It was a slick financial scam. A company that claimed to be an institutional lender offered loans to corporate executives, accepted as collateral the stock that the executives held in their publicly traded companies, and then—unbeknownst to those executives—sold their stock out from under them.
But at its core, it was also a classic Ponzi scheme, a nearly century-old criminal technique that involves using proceeds stolen from victims as a way to keep a fraud going as long as possible.
After an investigation by FBI San Diego—with assistance from the Securities and Exchange Commission—the president of the company, Douglas McClain, Jr., was tried and convicted this past May in connection with this securities fraud scheme. (Included in the 2012 indictment was McClain’s partner James Miceli, who died shortly before trial). Just recently, McClain was sentenced to 15 years in federal prison and ordered to pay $81 million in restitution to his victims and to forfeit millions in ill-gotten gains, including cash and securities, a luxury home and car, a houseboat, and diamond jewelry.

McClain ran Argyll Equities, Inc., a company that operated in several U.S. states, including California. From at least 2004 to 2011, the company advertised itself as an institutional lender with significant assets that made loans to corporate officers and directors who may have been going through some professional hard times, wanted to expand their operations, or needed cash for personal reasons. And even though most were paper-rich because of their stock holdings, as company “insiders” they were not permitted to sell their stocks outright because of federal securities laws and regulations.

McClain conspired with loan brokers to fraudulently induce corporate executives—from the U.S. and abroad—to pledge millions of dollars of stock as collateral in return for a loan. These loans were attractive to corporate executives: by using their stock as collateral, they would receive a loan for typically 30 to 50 percent less than the current market value of their shares, and unless they missed a loan payment or saw a significant drop in stock prices, they would get their stock back upon repayment.

In reality, though, Argyll had no intention of giving the stocks back. They were quickly sold on the open market, sometimes even before the loans closed. And since Argyll had no other source of income, proceeds from the sale of the stocks were what McClain used to fund the loans…and he pocketed the difference between the loan amount and what the stocks actually sold for.
At the end of the loan term, the borrowers expected to get their stocks back, but McClain was full of phony excuses as to why that wasn’t happening—the stocks were tied up in a hedge fund, the borrower had defaulted on the loan by missing a payment, etc. And in some cases, selling the stocks caused a drop in stock prices, which in turn caused an actual loan default.

The moral of the story? Whether you’re a high-powered company executive or getting paid by the hour, before entering into a business arrangement, do your due diligence—research the individuals/companies involved, consult an independent third-party expert, and above all, remember that if sounds too good to be true, it probably is!