California Court Permanently Enjoins Developer of the “Derivium” “90% Loan” Tax Scheme
Scheme Involved Sales of Customers’ Securities Worth More Than $1.25 Billion
WASHINGTON – A federal judge in San Francisco has barred Charles Cathcart of Tuxedo Park, N.Y., from promoting a complex tax scheme involving numerous entities located around the globe and sales of over $1.25 billion in securities, the Justice Department announced today. Judge Phyllis J. Hamilton of the U.S. District Court for the Northern District of California signed the permanent injunction order.
The judge entered the injunction based on an extensive record, including facts to which the parties stipulated after Cathcart advised the court on the first day of trial that he would not put on any evidence to refute the government’s evidence. The record indicated that Cathcart, a Ph.D. economist, developed a scheme called the "90% Loan Program" and promoted it throughout the United States through companies he controlled —including Derivium Capital LLC and Derivium USA.
The 90% Loan Program falsely claimed customers could exchange their appreciated stock for loan payments equal to 90% of the stocks’ value without paying income tax on their capital gains. It also purported to allow the tax-free return of those customers’ stocks at maturity if the customers repaid the "loans."
But in fact, the record shows, customers’ stocks were sold immediately, with 90% of the sale proceeds going to make the purported "loans" to the customers, and the other 10% being retained by the promoters. Customers were told the loans were made by independent third-party lenders, but in fact the supposed loans were made through sham companies that Cathcart created and controlled. The sham companies never functioned as genuine lenders, never held or maintained any assets or reserves, and were located throughout the world in such far-flung places as the Isle of Man, Ireland and Hong Kong.
The court record shows that Cathcart, through the 90% Loan Program, sold more than $1.25 billion worth of customers’ stock in some 3,100 transactions, leaving more than $100 million for himself and the other promoters after payment of 90% of the sale proceeds to customers as purported loans. The government complaint in the case alleged that the scheme cost the U.S. Treasury an estimated $230 million or more.
Taxpayers are required by federal law to report sales of stock on their income tax returns and pay tax on gains from the sale. Judge Hamilton previously ruled that Cathcart’s customers were not receiving loans, because the transactions were in fact sales. Thus, Cathcart’s representations to customers that they were receiving loans were false statements about the scheme’s tax benefits. The stipulated record established that Cathcart’s claims about tax benefits were featured prominently in marketing materials to induce customers to engage in the scheme. Cathcart stipulated that he knew or had reason to know these claims were false.
The record shows that Cathcart also falsely told customers that Derivium would "hedge" their transactions to insure the return of their stock at the end of the transactions should they want to pay off their "loans" and get the stock back. But instead of hedging the transactions, which would have required the purchase of expensive call options correlated with his customers’ securities, Cathcart simply funneled at least $45 million of the stock sale proceeds to companies that he owned and controlled with his son Scott Cathcart and another scheme promoter.
The same court earlier barred Scott Cathcart, and Yurij Debevc, Robert Nagy, Charles Hsin and Franklin Thomason from promoting the 90% Loan program.
"Injunctions are a key component of the Justice Department’s efforts to stop complex tax schemes that falsely claim to help wealthy taxpayers eliminate income tax on capital gains," said John DiCicco, Acting Assistant Attorney General for the Justice Department’s Tax Division. "The Justice Department is committed to unraveling these schemes and revealing their true nature for judges to see."
Acting Assistant Attorney General DiCicco thanked Justice Department trial attorneys Nathan Clukey, Ellen Weis and Gregory Seador, who handled the case, and revenue agents Marie Allen and Judy Steiner of the Internal Revenue Service’s Small Business/Self-Employed Division, who conducted the investigation.
In the past decade the Justice Department has obtained injunctions against more than 435 tax-scheme promoters and tax preparers. Information about those cases is available on the Justice Department Web site.