Bogus tax advice is called part of scheme
Accused Ponzi artist Richard Elkinson told clients they did not have to pay taxes on the gains from investments they made in a company he supposedly ran, according to people who placed money with him.
Elkinson, a Framingham man whom authorities have charged with stealing $29 million from about 130 investors, did not send 1099 tax forms to his clients, as required by law, according to an investor whose family members also placed funds with Elkinson. This person said Elkinson also verbally told investors they did not have to pay taxes on the money, which would also be a breach of IRS rules.
Many people did pay taxes on the gains, knowing that Elkinson’s tax advice was illegal, according to the investor, who requested anonymity, out of embarrassment about the ordeal.
Federal prosecutors charged Elkin son with fraud earlier this month, contending that since 1997 he has raised money for a uniform-supply company by issuing promissory notes that paid high interest rates to investors. Authorities said that Elkinson’s company, Northeast Sales Co., never existed, and that he instead used the millions from investors to finance gambling trips to Las Vegas casinos. He has also been charged with civil fraud by the US Securities and Exchange Commission.
Elkinson’s actions around taxes should have been a clue that his operation was improper, said Donald Klaskin, a managing director in Boston for Corporate Resolutions Inc., a firm that does pre-deal background checks for investors.
“It probably should have raised a red flag,’’ Klaskin said. “When you don’t have to pay taxes on an investment, most people, I would think, should ask why.’’
Elkinson, 76, was arrested on Jan. 5 by FBI agents at a Biloxi casino, after having vanished for weeks, leaving investors stunned and empty-handed. He is being held in a Mississippi county jail, awaiting relocation to Massachusetts for trial.
But for many years, Elkinson was purportedly paying investors returns of 9 to 13 percent on their loans to him. Rather than receive their principal back, many investors would repeatedly roll over, or renew, those investments, every 10 or 11 months, not unlike bank certificates of deposit. Investors must pay taxes on such gains, according to IRS rules.
In the Bernard Madoff Ponzi scheme, the IRS allowed victims to claim deductions for their losses. The tax agency has not yet issued guidance on the Elkinson fraud.
Two businessmen who were paid to introduce investors to Elkinson, Jay L. Fialkow and Jeffrey P. Ross, also never received tax documents from Elkinson, according to a complaint filed against them by the Massachusetts Securities Division.
“While Fialkow told the division that he found this odd, he never pressed the issue with Elkinson,’’ the state said in its complaint. The state filed civil charges against Ross and Fialkow for failing to register as brokers selling securities. Fialkow and Ross said through a spokeswoman that they turned Elkinson in to the authorities and had no idea he was operating a Ponzi scheme, using new investors’ money to pay off other investors. The two men were paid $319,000 in fees for their introductions, from 2005 through last year, according to legal filings. But together, they said they lost nearly $2 million of their families’ money with Elkinson. Their spokeswoman, Diana Pisciotta, said they “never took a cent out’’ in gains.
Pisciotta said Fialkow and Ross were not responsible for providing tax documents to investors. As far as their personal tax payments, she said, “We are confident all appropriate tax obligations were met.’’ The IRS declined to comment on whether it is investigating Elkinson or his clients.
Elkinson declared himself indigent and has not yet been assigned a lawyer. He faces up to 20 years in prison, according to the US attorney’s complaint.
Beth Healy can be reached at bhealy@globe.com. 
