A financial advisor in Florida was sentenced today to eight years in federal prison for his role in a nearly decade-long scheme involving the promotion of an illegal tax shelter and the subsequent theft of client funds.
The sentencing, handed down by U.S. District Judge Keith Starrett for the Southern District of Mississippi, also includes three years of supervised release and an order to pay approximately $37 million in restitution to the United States.
According to court documents and statements made in court, Stephen T. Mellinger III, a financial advisor operating out of Delray Beach, who also worked as an insurance salesman and securities broker across Florida, Michigan, Mississippi, and other states, began the fraudulent scheme in late 2013.
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He conspired with others, including a relative, to market an illegal tax shelter that allowed clients to claim false tax deductions through purported “royalty payments.”
In reality, these “royalty payments” were nothing more than a circular movement of money designed to create the illusion of legitimate business expenses.
Clients would transfer funds to bank accounts controlled by Mellinger and his co-conspirators, who would then remit the money, minus a fee, to a different account under the client’s control. This allowed participants to maintain control of their funds while falsely deducting the transfers as business expenses on their tax returns.
The elaborate scheme resulted in the preparation of tax returns claiming over $106 million in fraudulent tax deductions, causing an estimated $37 million loss to the Internal Revenue Service (IRS). Mellinger and his relative reportedly pocketed approximately $3 million in fees for their involvement in the illegal operation.
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Further compounding his crimes, Mellinger, in January 2016, became aware that several of his clients were under investigation and that the U.S. government had begun seizing their assets. In response, Mellinger and his relative stole more than $2.1 million from some of these very clients. Court documents revealed that Mellinger used some of the stolen funds to purchase a home in Delray Beach.
The sentencing was announced by 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.
The case was investigated by IRS Criminal Investigation and the Department of Defense Office of Inspector General’s Defense Criminal Investigative Service (DCIS), highlighting the collaborative efforts of law enforcement agencies in uncovering and prosecuting complex financial crimes.
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