Tax Lien Agents Inc. Tax Scam of the 2000s
Perhaps the biggest tax scam of the 2000s reached its conclusion when the Supreme Court of South Carolina rendered a verdict against Ned B. Majors and Tax Lien Agents, Inc in 2003. The Supreme Court found that the South Carolina SEC commissioner had the authority to issue a cease and desist order against TLA and denied a rehearing of the case a month later.
Background of Tax Lien Agents
Ned Majors, president and only shareholder of Tax Lien Agents, Inc, opened TLA in 1998. The company’s practice was to buy tax lien certificates at auctions nationwide, acting as a purchasing agent for a Principal. TLA routinely offered lower interest rates than the statutory rates purchasers would normally accept, allowing them to bid competitively.
They targeted tax liens they were reasonably sure would not be redeemed and charged a non-refundable agency fee of 12% to 25% of the Principal’s lien purchase amount, with an inchoate interest of 50% for any unredeemed TLCs. Principals paid by cashiers check or Trust directive and entered into a contract with TLA.
How the Scam Worked
If the TLC was redeemed before the typically one- to three-year maturity date, the Principal would keep all redemption, interest, and penalty payments. If the TLC was not redeemed, as was most often the case, the Principle would confirm that Tax Lien Agents, Inc had a 50% ownership interest and then go about quieting the title and selling the property.
In most cases, Principals were absentee owners who would naturally choose to use the same agent to quiet and sell as they used to obtain the lien in the first place, leaving TLC free to work the entire process into their own favor, retaining nearly all benefits to holding the lien while passing on costs and downsides to the Principal. Principals could not sell their TLCs unless the third party agreed to the same contract and terms with TLA, and TLA retained first right of refusal.
The South Carolina SEC Steps In
In 2003, the attorney general of South Carolina issued a “Cease and Desist Selling Unregistered Securities and Engaging in Securities Fraud” order against TLA and held a public hearing in October of that year.
The SEC’s investigative report found that TLA’s contract with the Principals constituted an “investment contract.” Furthermore, TLA had not followed the registration requirements necessary to sell securities in SC. While the Commissioner of the South Carolina SEC stopped short of charging TLA with securities fraud, they did issue a Final Order to Cease and Desist after the hearing.
SC Supreme Court Decision
Ned Majors and the TLA took the order to court, attempting to argue that the “investment opportunity” they offered was not a security and calling into question the authority of the SEC to issue a cease and desist order. The lower courts found against Majors and the TLA, and the issue went up to the Supreme Court, who also found the SEC was within its rights to make the order. Furthermore, the court found that both the SEC commissioner and the lower courts had properly ruled the sale of TLCs an illegal investment contract.
Scams like those run by Tax Lien Agents continue to prove how important it is to consider carefully before investing, and especially when someone else is acting as the agent.