A former investment advisor and broker, Thomas Demergian, 63, has been sentenced to 4.5 years in prison for defrauding clients of approximately $1.8 million over a period of more than two decades.
Demergian, who operated in Madison, Wisconsin, pleaded guilty to charges of wire fraud and tax evasion in April. His sentence marks the culmination of a long-running scheme that exploited the trust of his clients, many of whom were elderly and vulnerable.
For RIAs and wealth advisors, the case serves as a stark reminder of the ethical and legal responsibilities that come with managing clients' assets. The trust placed in financial advisors by clients—particularly high-net-worth individuals—is paramount. This case underscores the importance of transparency, compliance, and maintaining the highest standards of integrity in the wealth management profession.
According to prosecutors, Demergian began soliciting funds from his clients as far back as 2000, convincing them to invest through an entity called IRT Company. He promised to allocate their investments to mutual funds and real estate trusts, presenting himself as a reliable steward of their financial future. However, once clients transferred their money to Demergian, he diverted the funds to a personal bank account and used them for his own benefit.
The U.S. Department of Justice detailed how Demergian spent the misappropriated funds on personal expenses, including gambling, luxury travel, automobiles, and collectibles. This misuse of client funds not only breached fiduciary responsibilities but also reflects the profound ethical violations that can occur when financial professionals put personal gain above client welfare.
During the sentencing hearing, Judge William Conley of the U.S. District Court for the Western District of Wisconsin did not hold back in his criticism of Demergian. "In terms of white-collar crime, this is the worst," Judge Conley remarked. He noted that Demergian had specifically targeted elderly and vulnerable clients, many of whom he had befriended over the years. For wealth advisors, this reinforces the critical need to vigilantly guard against any actions that could exploit client trust, particularly when dealing with retirees or those in vulnerable financial situations.
Letters submitted to the court by Demergian and his family sought to paint a more nuanced picture. In his own letter, Demergian acknowledged his guilt, explaining that he felt driven to steal from his clients in order to support his aging mother, who was suffering from both physical and mental health decline. His brother, a criminal defense attorney, added that Demergian was not a habitual gambler and claimed that the government's portrayal of his lavish spending was exaggerated. He described his brother as a man who became anxious after losing as little as $100 at a casino.
However, Judge Conley ultimately imposed a severe sentence, emphasizing the long-term nature of the fraud and the substantial amount of money involved. For RIAs, this case highlights the consequences of ethical lapses, even when personal circumstances may complicate an individual’s motives. The need for consistent oversight, regulatory compliance, and ethical practices cannot be overstated in the wealth management industry.
Demergian’s legal team had sought a more lenient sentence of 24 months, followed by three years of supervised release, citing his cooperation with authorities after the fraud was uncovered. However, the court found that Demergian’s cooperation came only after law enforcement was involved, mitigating any potential leniency.
The fraudulent activity remained undetected for more than two decades, only coming to light in 2023 when a relative of one of Demergian’s clients began asking questions about the status of the investments. This long delay in discovery should serve as a cautionary tale for wealth advisors, RIAs, and firms, underscoring the need for stringent internal controls, regular audits, and transparent reporting to clients.
Demergian had concealed his theft by providing clients with false portfolio statements that showed steady, positive returns. When clients requested to liquidate their investments, Demergian would either dissuade them by claiming it was not a prudent financial decision or provide other false explanations for why the liquidation could not proceed. This deceptive behavior—creating fictitious reports to mask the misappropriation of funds—is a violation that strikes at the core of client trust. For RIAs, this serves as a reminder that transparency and honesty are non-negotiable in client communications.
Adding to the severity of Demergian’s actions was his failure to report over $400,000 in illegally obtained income between 2017 and 2022. This resulted in more than $100,000 in unpaid taxes, compounding the fraud charges with a tax evasion count. For wealth management professionals, this case underscores the importance of not only adhering to fiduciary duties but also maintaining compliance with tax laws and reporting requirements.
As RIAs and wealth advisors reflect on this case, it’s important to consider the broader lessons it offers for maintaining the integrity of client-advisor relationships. Demergian’s fraud succeeded for as long as it did because clients trusted him implicitly and did not suspect foul play. The lesson here is clear: robust compliance mechanisms, transparent communication, and regular reporting are essential to prevent such breaches of trust.
The role of an RIA goes beyond managing investments; it involves cultivating long-term relationships built on trust, competence, and ethical responsibility. The consequences of falling short of these responsibilities can be devastating, not only for clients but also for the advisor and their firm. Regular audits, both internal and external, can help ensure that advisors remain accountable, while also providing clients with peace of mind that their assets are being handled appropriately.
For firms and individual advisors, it may be worth revisiting policies around communication and reporting. Ensuring that clients have a clear and accurate understanding of their portfolios, providing regular updates, and being open to questions can help prevent misunderstandings and build long-term trust. Additionally, fostering a culture of ethical behavior within the firm, where compliance is prioritized, can further safeguard against potential fraud.
The Demergian case also serves as a reminder of the importance of client education. Advisors should encourage clients to stay engaged with their financial plans, ask questions, and seek regular reviews. Clients who are more informed and involved are less likely to fall victim to schemes that take advantage of their trust.
As the wealth management industry continues to evolve, the need for vigilance, transparency, and ethical standards remains as critical as ever. This case underscores that when these standards are compromised, the consequences are severe. For RIAs, maintaining a firm commitment to ethical practices, along with stringent oversight and communication, is essential to preserving client trust and ensuring long-term success in the industry.
