Florida Financial Advisor Sentenced for Promoting Illegal Tax Shelter and Stealing Client Funds

A Florida financial advisor was sentenced today to eight years in prison for orchestrating a nearly decade-long scheme to promote an illegal tax shelter and to steal client funds.

The following is according to court documents and statements made in court: Stephen T. Mellinger III, of Delray Beach, was a financial advisor, insurance salesman, and securities broker operating in Florida, Michigan, Mississippi, and elsewhere. Beginning in late 2013, Mellinger conspired with others to promote an illegal tax shelter whereby clients would claim false tax deductions for so-called “royalty payments” to fraudulently reduce their taxes. In reality, the “royalty payments” were merely a circular flow of money designed to give the appearance of genuine business expenses. Typically, a client would send money to bank accounts controlled by Mellinger and his co-conspirators, who then sent the money, minus a fee, to a different bank account that the client controlled. Tax shelter participants retained control of the money they transferred, while falsely deducting the transfers as business expenses on their tax returns.

In total, Mellinger and his co-conspirators helped clients prepare tax returns that claimed over $106 million in false tax deductions, which caused a tax loss to the IRS of approximately $37 million. Mellinger and a co-conspirator, who was a relative, collectively earned approximately $3 million in fees from the scheme.

In January 2016, Mellinger learned that several of his clients were under investigation and that the United States had started seizing their funds. Mellinger and the relative subsequently stole more than $2.1 million from some of the clients, a portion of which Mellinger used to buy a home in Delray Beach.

In addition to the prison sentence, U.S. District Judge Keith Starrett for the Southern District of Mississippi ordered Mellinger to serve three years of supervised release and to pay approximately $37 million in restitution to the United States.

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 Deputy Inspector General for Investigations and Director of DCIS Kelly P. Mayo made the announcement.

IRS Criminal Investigation and the Department of Defense Office of Inspector General’s Defense Criminal Investigative Service (DCIS) are investigating the case.

Trial Attorneys Richard J. Hagerman, William Montague and Matthew Hicks of the Tax Division, Trial Attorneys Emily Cohen and Jasmin Salehi Fashami of the Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), and Assistant U.S. Attorney Charles W. Kirkham for the Southern District of Mississippi are prosecuting the case.