Offshore Shenanigans

A company called Derivium Capital LLC is under investigation by the IRS and the Franchise Tax Board for making loans that allegedly weren’t loans, according to Forbes.

The scheme aided taxpayers who were sitting on large stock gains. According to Forbes, “The Derivium deal called for the customer to get a loan equal to 90% of the value of his shares. If the stock went up, he could get it back by repaying the loan, with interest. If the stock went down, he could walk away and owe nothing. And, supposedly, the initial loan was not a sale and thus not taxable.”

But the IRS and the FTB think otherwise, and Derivium sits in bankruptcy. The California Corporations Commission filed suit in 2002 to stop the loans (see this link); it appears Derivium stopped its activity in California soon thereafter. Derivium’s bankruptcy filing is noted in this article in the Times-Record of Middletown, NY. The firm either used “unique and proprietary business model for marketing and administering sophisticated loan transactions” or was “a giant Ponzi scheme.”

Arbitrators so far have ruled that Derivium owes ex-clients $80 million, with many more claims filed. Of course, the bankruptcy filing may forestall those complaints, along with the problems of Derivium’s lender, Bancroft Ventures of the Isle of Man. Forbes reports that Bancroft’s directors have quit, and that Bancroft moved to Cyprus and the new directors are from Beirut.

My usual advice applies to “loans” like these: If it sounds too good to be true, it probably is. So now Derivium’s clients are looking at both tax troubles and possible loss of their loan capital.

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