A former financial advisor based in Florida was sentenced to eight years in prison and now owes the U.S. government $37 million for a decade-long scheme to promote an illegal tax shelter that helped him and co-conspirators grab $3 million, according to the Department of Justice.
Florida-based Stephen T. Mellinger of Delray Beach, Fla., pleaded guilty in February to a tax shelter scheme started in 2013. In this fraud, he had clients claim more than $106 million in false tax deductions. The result was a $37 million loss for the IRS, a windfall in fees and eventually stolen client assets for Mellinger and co-conspirators, including a relative.
Mellinger, now deregistered, was a financial advisor, insurance salesperson and securities broker working with clients in Florida, Michigan and Mississippi. According to BrokerCheck, he worked at Baird and Northwestern Mutual before joining NYLIfe Securities in 2009. He was fired in 2016 for exceeding “the scope of approved business activities.”
Through the tax scheme, he and co-conspirators promoted a tax shelter to clients by which they could claim false tax deductions for “royalty payments.” Those payments were “a circular flow of money designed to give the appearance of genuine business expenses,” according to the DOJ.
Clients would send money to bank accounts controlled by Mellinger and his co-conspirators, who would then send the money, minus a fee, to a different bank account the client controlled. The clients would then claim those exchanges as business expenses for tax discounts.
In January 2016, Mellinger heard several clients were under investigation and that the U.S. government had started freezing their funds. He and a relative working with him responded by stealing over $2.1 million from client accounts, using a portion of it to buy a home in Delray Beach.
The DOJ did not respond to a request for further details on the other people involved with the scheme.
U.S. District Judge Keith Starrett for the Southern District of Mississippi sentenced Mellinger to eight years in prison and three years under supervised release. The judge also ordered him to pay the United States about $37 million in restitution.
IRS Criminal Investigation and the Department of Defense Office of Inspector General’s Defense Criminal Investigative Service continue investigating the case.