A former Florida-based investment advisor has been sentenced to eight years in federal prison for operating a fraudulent tax scheme that generated over $100 million in fictitious deductions and caused an estimated $37 million in tax losses to the U.S. government.
Stephen Mellinger III, who was affiliated with Eagle Strategies and NYLife Securities—both subsidiaries of New York Life—pleaded guilty to tax evasion and wire fraud earlier this year. In a scheme spanning a decade, from 2013 through 2023, Mellinger and a small network of collaborators, including accountant Jason Crace and two unnamed co-conspirators described by federal prosecutors as “promoters,” created an illegal tax shelter that misled dozens of high-net-worth clients.
At the core of the scheme was a sophisticated arrangement that appeared to create legitimate business deductions in the form of royalty payments. In reality, these were artificial transactions involving circular cash flows that left clients with full control over the funds they had “paid,” while still claiming tax deductions. According to the Department of Justice, the scheme enabled participating clients to falsely reduce their taxable income by collectively more than $106 million.
Federal prosecutors emphasized that the transactions had no economic substance. “Tax shelter participants retained control of the money they transferred, while falsely deducting the transfers as business expenses on their tax returns,” the DOJ stated. Funds moved from client-controlled accounts to entities tied to Mellinger and his partners, only to be routed back—less a fee—under the guise of royalties or licensing agreements.
Mellinger and one co-conspirator identified as “Promoter 2” earned approximately $3 million in fees for facilitating the scheme. Crace, the accountant involved, pleaded guilty last year to filing a false tax return and is scheduled to be sentenced in July. Attorneys representing both Crace and Mellinger either declined to comment or did not respond to media inquiries.
For advisors, the case is a cautionary tale on multiple fronts: compliance oversight, outside business activities, and the risks of aggressive tax planning strategies that lack economic substance.
Regulatory filings show Mellinger was registered as both an investment advisor and a broker during his time with New York Life affiliates. He left the firm in January 2016 amid an internal investigation related to outside business referrals. A New York Life spokesperson did not respond to requests for comment about the matter or its internal oversight processes at the time.
In addition to serving prison time, Mellinger was ordered to pay restitution of approximately $37 million to the U.S. Treasury. The Justice Department has not disclosed whether any of Mellinger’s clients will face legal action for their participation in the scheme, but the structure of the transactions could potentially expose them to audits or penalties if they knowingly submitted fraudulent returns.
This case underscores the importance of due diligence and ethical conduct in tax-related advisory services. While the use of sophisticated tax planning tools is common in high-net-worth estate and business planning, strategies that lack economic substance or fail IRS scrutiny can carry severe consequences—for clients and the professionals advising them.
The regulatory implications for wealth managers and broker-dealers are also significant. Firms must monitor for potential abuse of outside business activities, particularly when advisors engage in complex planning involving entities, intellectual property structures, or royalty agreements. According to public records, Mellinger’s affiliation with New York Life ended during such a review process, although the firm has not disclosed the specific findings or timeline.
For RIAs and hybrid advisors working with tax professionals, this case is a reminder that close collaboration must be built on transparency and a shared commitment to legal compliance. When advisors stray from fiduciary duty in pursuit of aggressive schemes—especially those marketed as tax shelters—they not only put clients at risk, but potentially the integrity of their firm’s broader compliance posture.
The Department of Justice continues to prioritize the prosecution of professionals who facilitate abusive tax shelters. The Mellinger case follows several recent actions targeting advisors, attorneys, and CPAs who create or promote tax schemes designed to evade federal obligations.
As enforcement tightens and audit scrutiny intensifies under expanded IRS funding, wealth managers should assess the tax strategies implemented across client portfolios. Emphasis should remain on structures that demonstrate real economic activity, comply with prevailing guidance, and are supported by proper documentation and substance over form.
For advisors, the path forward demands a disciplined and ethical approach—particularly when navigating areas such as income deferral, pass-through entity structuring, and alternative asset deductions. Sophisticated clients increasingly expect advanced planning—but equally, they rely on their advisors to steer them clear of legal and reputational landmines.
With Mellinger now facing prison time and a $37 million restitution order, this case reinforces the broader industry lesson: aggressive tax avoidance masquerading as legitimate planning can lead to severe personal and professional consequences.
