Congressman Alan Grayson of Florida lost $18 million in a scheme that cheated him and about 120 other investors out of more than $35 million, according to court papers.
The Virginia man who ran the scheme, William Dean Chapman, was sentenced Friday in federal court to 12 years in prison. Prosecutors say Chapman used the money to fund a lavish lifestyle including a Lamborghini, a Ferrari and a $3 million home.
In most of the court papers, Grayson's identity is protected — prosecutors say only that an elected official with the initials A.G. was the primary victim — but documents twice mention Grayson by name. The Democratic congressman from Orlando confirmed on Monday that he is the A.G. mentioned in the documents.
Nothing in the court papers suggests Grayson was anything but a victim of the scheme. Grayson, a former trial attorney, said he has had a long record for picking winning stocks, which formed the basis for his personal fortune.
Grayson represents Florida's 9th Congressional District in the central part of the state. He is in his second term in Congress, but his first in the 9th district. He previously served in Florida's 8th Congressional District from 2009-2011, but lost his re-election bid in 2010.
The scheme worked like this: clients would turn over their stocks to Chapman as collateral for a loan, and Chapman would let customers borrow about 90 percent of the stocks' value.
If the stocks did badly, borrowers could walk away and keep the money they were loaned. But if the borrowers' stocks did well, they would repay the loan with interest, and Chapman was supposed to return the stocks to the investor at their increased value.
But, according to court papers, Chapman sold the stocks and had no way to fulfill his obligations if a client's stock portfolio did well.
"That's why (Chapman) is going to prison for a long, long time," Grayson said. "At least in the end, some kind of justice was served."
In Grayson's case, his stocks performed astronomically well while they were entrusted to Chapman and his company, Alexander Capital Markets.
Lawyers for Chapman said it was the strength of Grayson's stocks that caused Chapman's scheme to crumble. Chapman and Grayson negotiated a payment plan, according to court records, but it was not enough to keep Chapman's positions from collapsing.
"Because the return on A.G.'s commodities investments were so astronomical, ACM could not meet its obligations under the loan agreements," defense lawyer Whitney Minter wrote.
In 2007, Grayson had $9.35 million in a stock portfolio that Chapman was supposed to be holding as collateral. In that year alone, the portfolio's value increased by 147 percent, to $23 million, according to a chart in the court documents.
Chapman's lawyer did not immediately return a call. Chapman, of Sterling, Va., pleaded guilty in May but tried at Friday's sentencing hearing to withdraw the plea, saying he felt pressured to plead and that he never intended to defraud.
It is not the first time Grayson, who represents parts of the Orlando area, has lost tens of millions of dollars in a fraud scheme. In 2009, he won a $34 million judgment after filing a lawsuit in South Carolina under federal racketeering laws against a company called Derivium Capital. Derivium's business plan for hedging an investor's stock profile was nearly identical to the plan outline by Chapman.
Grayson said he first entered into deals with Chapman in 2003, well before the deal with Derivium went south, so he had no reason to be suspicious of the arrangement.
And he said the loans themselves were a perfectly reasonable way to manage his portfolio, but relied on Chapman and Derivium to hold up their end of the bargain. He disputed that the astronomical returns to which he was entitled caused Chapman's downfall.
"If they had not sold the collateral, it all would have worked," said Grayson, who is generally listed as one of the 20 wealthiest members of Congress with assets of more than $20 million. His financial disclosure forms list holdings in dozens of stocks. His dealings with Chapman preceded his time in Congress, which began in 2009.
Court records indicate Chapman's firm was drawing regulatory scrutiny as early as 2007.
Grayson also expressed concern that his identity as a victim was not protected by the court file, and that a defense motion and an attachment to a prosecution motion both identified him by name despite procedures that are supposed to be in place to protect victims' privacy.
"I think that's unfortunate," Grayson said. "They should have been more careful, should have used my initials throughout rather than using my name."
Before he was elected to Congress, Grayson practiced law and was best known for winning a major whistleblower lawsuit exposing fraud on a government contract in Iraq.
In the House, he is known as one the most sharp-tongued critics of Republicans, once famously summarizing Republicans' health care plans as little more than wanting sick people to "die quickly."