A Florida financial advisor was sentenced to eight years in federal prison today for his role in a nearly decade-long fraud that involved promoting an illegal tax shelter and the subsequent theft of client funds.
The sentence, imposed by U.S. District Judge Keith Starrett for the Southern District of Mississippi, includes three years of supervised release and a restitution judgment of about $37 million to the United States.
According to court documents and affidavits, Stephen T. Mellinger III, a Delray Beach-based financial advisor who also operated as an insurance salesperson and securities broker in Florida, Michigan, Mississippi, and other states, started the fraudulent operation in late 2013.
He cooperated with others, including a relative, to market an illegal tax shelter that allowed clients to claim fake tax deductions via phony “royalty payments.”
In actuality, these “royalty payments” were nothing more than a circular movement of money intended to provide the appearance of legitimate company expenses.
Clients would send payments to bank accounts controlled by Mellinger and his co-conspirators, who would then remit the amounts, minus a charge, to another account under the client’s control. This allowed participants to keep control of their funds while incorrectly claiming the transfers as company costs on their tax returns.
The intricate scam culminated in the drafting of tax returns claiming more than $106 million in bogus tax deductions, resulting in an estimated $37 million loss for the Internal Revenue Service. Mellinger and his uncle reportedly received almost $3 million in fees for their role in the illicit activity.
Mellinger’s crimes were exacerbated when, in January 2016, he learned that several of his clients were being investigated and that the US government had began confiscating their assets. In response, Mellinger and a relative stole more than $2.1 million from some of these same clients. According to court filings, Mellinger used some of the stolen money to purchase a property in Delray Beach.
The sentence was announced by Acting Deputy Assistant Attorney General Karen E. Kelly of the Justice Department’s Tax Division, Matthew R. Galeotti, Head of the Justice Department’s Criminal Division, Acting U.S. Attorney Patrick Lemon for the Southern District of Mississippi, Special Agent in Charge Demetrius Hardeman of IRS Criminal Investigation’s Atlanta Field Office, and Kelly P. Mayo, Deputy Inspector General for Investigations and Director of DCIS.
The case was investigated by IRS Criminal Investigation and the Department of Defense Office of Inspector General’s Defense Criminal Investigative Service (DCIS), demonstrating law enforcement agencies’ joint efforts to detect and prosecute complex financial crimes.
