WASHINGTON, D.C. (YBH.ME) – Firebrand Democrat Alan Grayson was elected to Congress in November of 2008. The first term Congressman from Florida’s 8th District has spurned the role of rookie or backbencher and has instead launched full force into the health care debate currently embroiling Washington. Last week, he said Republicans “want people to die.” He later hyperbolically compared the current health care system to a “holocaust.”
Congressman Alan Grayson
Outside of making headlines for controversial statements or grilling AIG executives in congressional hearings, who is Alan Grayson?
The 6’4” Grayson is a Harvard Law grad that clerked for both Ruth Bader Ginsburg and Antonin Scalia. Grayson’s outspoken manner, and more importantly, his progressive politics, has made him a darling of the left. His staff is reputed to eagerly work the web looking for ideologically friendly portals to highlight his sound bite-friendly statements. For instance he once referred to Rush Limbaugh as a “has-been hypocrite loser” who was “more lucid when he was a drug addict.” He is also a member of the Congressional Progressive Caucus.
Alan Grayson made a fortune as the first President of IDT, Corp., a large telecom concern founded in the early 1990’s. Grayson spent $2.5 million of his own money during the 2008 election cycle, a princely sum to earn a job that pays $174,000 per year plus benefits. Grayson is also the 12th-richest member of the U.S. House and Senate with $31 million of listed assets.
Health care isn’t the only area where Alan Grayson has dived into controversy.
Before being elected to congress, Grayson took on contractor fraud in Iraq. The Wall Street Journal commended Grayson for his work protecting whistle blowers and said he was “waging a one-man war against contractor fraud in Iraq.”
An interesting area of Alan Grayson’s history concerns his dealing with a small South Carolina financial firm named Derivium Capital LLC. In 2005, Grayson claimed he was the victim of a Ponzi scheme that Derivium engineered.
The Florida Congressman took part in what was known as a “90% stock-loan” program. Participants in the program received three-year loans of up to 90% of the value of any stock they put up as collateral. Upon maturity, participants paid back the loan plus interest and received the stock back. Any gain the stocks made during the loan term belonged solely to the participant. Derivium purportedly only made its money from interest on the loans.
The best part? If stock prices went down during the loan term, investors could surrender the stock and walk away with their 90% payment.
Over five years Congressman Grayson placed $29 million of his personal holdings, mostly deriving from his stint as President of IDT, with Derivium, for which he received $26 million in cash. Grayson used the money for various investments in Latin America.
Derivium made over $1 billion worth of “90% stock-loans” to more than 1,400 clients from 1997-2005. In 2005 Derivium unexpectedly went bankrupt. When the dust settled Grayson was out $3 million in cash plus $30+ million in paper profits. Grayson, a private attorney at the time, said, “It’s beginning to look like it may have been a very sophisticated Ponzi scheme.” Before going belly-up, Derivium claimed to have paid Grayson $600,000 in gains when he paid back his initial loans with the firm.
The IRS took a sightly different view of the whole affair and stated that while potentially a Ponzi scheme, Derivium’s practices also amounted to a “tax fraud scheme.”
A 2007 memo from the U.S Department of Justice sums up the government view of Derivium’s activities as follows:
“According to the government’s complaint the defendants promoted a scheme that helped customers disguise sales of appreciated stock or other assets (which would result in substantial income taxes on capital gains) as purported transfers of the assets as collateral for sham loans. The defendants are alleged to have falsely advised clients that because the transactions were in the form of a loan, instead of a sale, they were not obligated to report the transactions as sales on their income tax returns. The complaint further alleges that virtually all of the purported “loan” funds paid to customers were in fact derived from the sale of the customers’ appreciated assets.
The government suit also alleges that some clients were unaware that their “loans” were funded by sales of their securities, and later asked defendants to return the securities. According to the complaint, this caused “massive problems” for the defendants because it “had the characteristics of a Ponzi scheme, in which the proceeds of new transactions were used to cover shortfalls from prior sham transactions.” Derivium Capital LLC is in a Chapter 7 bankruptcy proceeding in South Carolina, but the suit alleges that the individual defendants are continuing to promote improper schemes.
The suit alleges one customer, an engineer from Hermosa Beach, Calif., used the scheme to dispose of more than $700,000 worth of appreciated stock and failed to report $677,777 of gain.”
In total, the DOJ estimates that Derivium and its partners cost the U.S Treasury over $230 million. According to court documents and public records Grayson has not been accused of any wrongdoing by the government.
Grayson was a party to a lawsuit filed against Derivium and its principal partners in 2007. In early 2009 a jury awarded Derivium victims $270 million in damages. Grayson’s share of that is $34 million. Grayson and the other Plaintiffs in the case are expected to see little if any restitution from Derivium.
During the trial Derivium’s attorneys tried to paint Grayson as a tax cheat. A July 2009 article by Orlando’s Local 6 covered the whole affair:
“The Derivium defendants Grayson sued in South Carolina tried to delve into all 92 “stock loans” Grayson participated in dating back to November 2000 – not just the 33 profitable ones that Grayson relied on to set his damages at $34 million.
And, to determine how Grayson treated them in his taxes, they asked the judge to order Grayson to produce his income tax returns.
In a June 2008 hearing, an attorney for one of Derivium’s owners said Grayson had taken some cash profits “and got that money sent to the Cook Islands … and I want to see how this shows up on his tax returns. Are all the gains shifted to (the AMG Trust) and the Cook Islands where they do not have to file tax returns?”
The attorney also suggested Grayson could have claimed losses on some trades to reduce his taxes, while concealing profits in the Cook Islands to evade capital gains. “If he is playing fast and short with the IRS, I think that’s relevant in this case,” the attorney argued.”
The judge in the case denied Derivium’s attorneys access to Grayson’s tax returns.
The article also states:
“In a February 2009 hearing, a U.S. Justice Department tax attorney told a federal magistrate he believes all of the 270 Derivium clients audited so far by the IRS were found to have used the loans as an abusive tax shelter.”
Grayson was not one of those audited. In his own defense, Grayson stated “My taxes were reported accurately year after year without any question.” If anything, he said, “the scheme made my taxes higher rather than lower.”
In addition to suing Derivium and its partners, Grayson also paid Derivium’s bankruptcy trustee $25,000 for the right to sue Wachovia Securities (now owned by Wells Fargo) for “turning a blind eye” to Derivium’s allegedly fraudulent activities. According to the deal terms, Grayson (through Grayson Consulting Inc.) will receive 90% of any proceeds from a lawsuit now pending against Wells Fargo. Grayson is currently a member of the House Financial Services Committee, which oversees many of Well Fargo’s business practices. A potential conflict of interest that Grayson denies is an issue. The case was filed in South Carolina District Court on April 10, 2008.
Alan Grayson is, if anything, a colorful character. Ponzi scheme victim, former Supreme Court clerk, business titan, Congressman and rabble-rouser. However you slice it, Alan Grayson is stepping into the spotlight with his bold and, to some, outlandish statements. The question is will the historically majority Republican voters in Florida’s 8th district be comfortable with him as their voice in Congress in 2011.
John Romano is the publisher Yes, But However!, the lead singer of the rock band The Sugarmen, a political correspondent for BBC Radio London and a and a serial web entrepreneur. Oh, and his nickname is Johnny Rome, has been for 15 years.
