Wachovia Sued for Millions in 1031 Exchange Fraud

Wachovia Corp., the troubled banking and financial services company that was the subject of a bidding war between Citigroup Inc. and Wells Fargo & Co., the target of a $60 billion lawsuit from Citigroup, and that has also been linked to money laundering by Mexican and Columbian drug cartels, has now been sued by the victims of  a fraudulent scheme to steal millions of dollars in client funds held by The 1031 Tax Group LLP (1031TG), a 1031 exchange qualified intermediary scam operated by Ed Okun.

Okun was indicted, along with Lara Coleman, on July 10, 2008, by a federal grand jury in Richmond, Va., and charged with conspiracy to commit mail and wire fraud, conspiracy to commit money laundering, wire fraud, mail fraud, money laundering, bulk cash smuggling and forfeiture. Okun is also charged with one count of making false statements.

The new lawsuit by the 1031TG Trustee alleges that Wachovia aided and abetted breaches of fiduciary duty by Edward Okun and Lara Coleman against the 1031 Tax Group Debtors, and seeks to recover more than $140 million of damages arising from such actions.

According to a lawsuit filed in the Southern District of New York on October 2, 2008, by the Trustee for the bankrupt tax-deferral company, “Wachovia was entwined in all aspects of the 1031 debtors’ operations, Okun’s personal finances and Okun’s other businesses” and assisted in the fraud by transferring $240 million to “inappropriate” accounts before the tax firm collapsed and Okun was arrested.

The lawsuit seeks recovery of more than $43 million of conveyances allegedly made to Wachovia in the form of cash and mortgage liens, and the imposition of equitable liens and constructive trusts on several properties in which Wachovia continues to hold liens.

The complaint also asserts that Wachovia housed more than 250 bank accounts for the 1031 Tax Group Debtors as well as other Okun Entities; provided several personal loans to Okun; and made commercial loans to Okun-related entities, such as IPofA affiliates. 

The lawsuit further alleges that during the course of this relationship, Wachovia learned that Okun and others were misappropriating funds of the 1031 Tax Group Debtors, but did nothing to stop the misappropriations, and in fact took steps that furthered the misconduct.

Windfall for Lender – Or Will Natural Gas Discovery Benefit Victims of Ed Okun’s 1031 Tax Group Scam?

There’s a new ripple in the story of indicted 1031 exchange scammer Edward Okun, the 1031 Tax Group, and their victims.

Cordell Funding is a Miami-based hard money mortgage lender. Last fall, Cordell Funding sued Okun to recover $17 million it had loaned to Okun before his fraud-riddled real estate empire collapsed into bankruptcy actions and criminal indictments.

Cordell Funding initially sued Okun in a New York state court, but a federal judge transferred the suit to the U.S. Bankruptcy Court in Manhattan, where Gerard McHale, the court-appointed Chapter 11 trustee of Okun’s 1031 Tax Group, was selling off Okun’s assets.

As part of that bankruptcy case, McHale turned over the rights to several Okun properties to Cordell. One of the properties that McHale turned over to Cordell was the Shreveport Industrial Park, a nearly empty 42-year-old, 956,735-square-foot Class C industrial distribution building at 9595 Mansfield Road in Shreveport, Louisiana.

It wasn’t worth much — certainly not the $17 million that Cordell said it was owed by Okun.

Then natural gas was discovered in the area. 

In fact, it was discovered that under the Shreveport Industrial Park is the largest onshore natural gas field in North America.   It could hold as much as 20 trillion cubic-feet equivalent of natural gas reserves.

The mineral rights lease for the Sheveport Industrial Park is now valued at somewhere between $30 and $60 million.

And property values for the area have soared.

It looks like Cordell Funding got a windfall from the bankruptcy court. 

But when the natural gas field was discovered, bankruptcy trustee McHale went back to court to have the bankruptcy judge of the 1031 Tax Group vacate the order giving Cordell Funding rights to the Shreveport property. At the same time, McHale has asked the bankruptcy judge to approve a mineral rights lease with PetroHawk Energy for the benefit of the 1031 Tax Group victims.

Now whether Cordell Funding or the hundreds of creditors of the 1031 Tax Group gets the millions of dollars from the Shreveport natural gas discovery will be determined by the bankruptcy court.

UPDATE:

For the latest on Ed Okun (new federal indictments, plus the indictments of Laura Coleman and Richard B. Simring), click here.

Has the Credit Market Thawed? Is it Freezing Up Again? And Are You Still Out in the Cold?

We’ve written before about the failure of the Fed’s policy of cutting short-term interest rates — seven times since September 2007 — to spur liquidity in the credit market. 

The good news today is that there is “significant improvement in the credit markets since late March,” according to the Wall St. Journal.

The bad news, also reported by the Wall St. Journal, is that this recent thaw in the credit market is not expected to last:

“‘Most of us are anticipating two steps forward, one step back and carefully watching where the markets can handle deals,’ said Tyler Dickson, who oversees capital raising at Citigroup.”

“‘There’s no question the tone in the market is getting better,’ says Jim Casey, co-head of leveraged finance at J.P. Morgan Chase.  He adds, however, that ‘there is some concern that this might be a short-term window of opportunity for issuers, since investors are still very focused on default rates and the potential severity of a recession.'”

“‘Risk tolerance is still pretty low,’ says Daniel Toscano, a managing director of leveraged and acquisition finance at HSBC Securities in New York.”

“Banks and debt investors are treading carefully,” the article said. “Investment banks, which incurred big losses after selling a lot of buyout debt at heavily discounted prices, are committing only to deals they can underwrite at a profit. And investors don’t want to be caught wrong-footed if corporate defaults spike.”

We think that the report of a credit thaw is premature.  For most businesses and individuals, the credit market is still frozen solid. 

Blackstone Group LP President Tony James appears to agree with us.  James told Bloomberg News that banks are mistaken if they think credit markets have begun a sustained recovery. 

Rather than a real break in the dismal credit forecast, James said that this little patch of sunshine may be “the eye of the hurricane.”

There is clearly no de-icing of the credit market that would significantly impact the housing crisis or allow Fed Chair Ben Bernanke to sleep without getting the chills at night.

 

 

$23 Million Settlement Reached with UBS in 1031 Exchange Scam Lawsuit

The plaintiffs in a class action lawsuit who allege they lost over $80 million that they had placed with Southwest Exchange, Inc. (SWX) and several other 1031 exchange accommodators or qualified intermediaries (QIs) have reached a settlement with one of the defendants, UBS Financial Services, Inc. (UBS).

You can read our earlier post about the lawsuit here.

Under the terms of the settlement, the plaintiffs will receive $23 million from UBS.

The settlement was approved by the court on March 28, 2008, and a notice was sent to the class action plaintiffs on April 2, 2008.

You can read the settlement notice sent by the law firm of Hollister & Brace here.

UBS is one of several defendants who are alleged to have participated with Donald Kay McGahn and and others in a scheme to steal the money that had been entrusted to them to facilitate tax deferred 1031 exchanges.

In addition to UBS, the plaintiffs claim that other major financial firms, including Citigroup and Salomon Smith Barney, participated in the scheme.

A criminal investigation continues.

UPDATE:

For more on UBS, click here.

Freddie Mac to Buy $10-15 Billion in Jumbo Loans — Move Hopes to Jump-Start Liquidity in Home Loan Market

Some relief may be in store for the battered residential real estate markets in California, New York, and other high cost states, as Freddie Mac announced on Thursday that it will buy jumbo mortgages in areas with high real estate prices from four of the largest U.S. mortgage lenders.

Freddie Mac’s purchase of conforming jumbo mortgages is restricted to 224 high cost markets where median home prices exceed Freddie Mac’s $417,000 loan limit.

Qualified borrowers in these states can now apply for an array of fixed-rate or adjustable rate conforming jumbo mortgages that will be less expensive than non-conforming jumbo loans in high cost markets.

Borrowers can use Freddie Mac conforming jumbo mortgages to finance up to 90% of a property’s value.

Freddie Mac said in a press release that it will purchase conforming jumbo loans from Wells Fargo, JPMorgan Chase, Citigroup, and Washington Mutual. 

It expects to finance between $10 and $15 billion in new jumbo mortgages in 2008.

The press release called the decison Freddie Mac’s “first large-scale effort to jump-start the stalled jumbo mortgage market under the Economic Stimulus Act.” 

The Economic Stimulus Act temporarily raised Freddie Mac’s conforming loan limit from $417,000 to as much as $729,750 through December 31, 2008.

The move is another is a series of federal actions that are meant to increase liquidity in the housing finance market.

Congress tried to ease jumbo loan rates in February, when it allowed Fannie Mae and Freddie Mac to guarantee bigger mortgages of up to almost $730,000 dollars.

But, so far, the banks has failed to respond to these new government guarantees by lowering interest rates or increasing liquidty in the home loan market.

The reason, accoprding to the banks, is that they need to sell their loans to investors, but investors aren’t buying.  Freddie Mac’s move is intended to free up the lenders’ balance sheets and allow them to concentrate their efforts on originating these loans.

“Purchasing conforming jumbo mortgages for our portfolio shows how we can bring new liquidity to markets other investors have all but abandoned and make full use of the new tools Congress gave us to help restore stability during the current housing crisis,” said Freddie Mac Chairman and CEO Richard Syron. “We initially expect conforming jumbo mortgages to have rates that are as much as half a percentage point below the jumbo market rate in many of these high cost markets.”

While specific product availability may vary by lender, Freddie Mac has said it will buy 15-, 20-, 30- and 40-year fixed-rate, fully amortizing conforming jumbo mortgages; 30-year fixed-rate mortgages with 10-year interest-only periods; fully amortizing 5/1 adjustable-rate mortgages (ARMs) and 5/1 ARMs with 10-year interest-only periods. Qualified borrowers can also obtain cash-out refinance conforming jumbo mortgages that provide a maximum cash-out of $100,000.

Lawsuit Claims $80 Million Stolen in 1031 Exchange Scheme

More 1031 exchange accommodators are in very hot water.

And millions of dollars that people thought were going to be used for 1031 exchanges are missing.

Last week, Edward Okun and others were indicted in a 1031 exchange intermediary scheme that is alleged to have defauded clients of approximately $132 million.

A class action lawsuit has been filed in the California Superior Court of Santa Barbara County alleging that 130 people from 12 states lost over $80 million that they had placed with Southwest Exchange, Inc. (SWX) and several other 1031 exchange accommodators or qualified intermediaries (QIs).

The QIs are alleged to have been taken over by Donald Kay McGhan and other individuals with the purpose of stealing the money that had been entrusted to them to facilitate tax deferred 1031 exchanges.

The lawsuit claims that a “group of thieves discovered that these Exchange Accommodators were unregulated businesses holding large sums of cash that needed ready access to only a small percentage of the money to operate as going concerns. Pursuant to a conspiracy, these thieves purchased several Exchange Accommodators, gained access to their funds held in trust with the assistance of certain brokerage houses, stole the majority of those funds for personal gain, and caused over $80,000,000 in damages which was exposed when the real estate market finally cooled.”

According to the lawsuit, money held in trust by SWX was funneled to shell companies that Santa Barbara businessman Donald Kay McGhan set up to launder the funds, which were then withdrawn for his and his accomplices’ benefit.

The plaintiffs claim that the exchange accomodators were operated as a ponzi scheme by Donald Kay McGhan and his alleged accomplices.

Because the real estate market was hot in 2004 and 2005, money coming in for new 1031 exchanges could be used to cover funds deposited for previous exchanges that McGhan and his cohorts had already raided.

When the real estate market suddenly cooled at the end of 2005, the number of 1031 transactions declined and not enough money was coming in to cover the embezzled funds, according to the suit.

By April 2006, the scheme began to unravel as SWX faced liquidity problems, the lawsuit states, and by October 2006, approximately $80 million was missing from the trust funds.

The QI defendants in the lawsuit include Southwest Exchange, Inc. (SWX), doing business as Southwest Exchange Corporation and Southwest 1031 Exchange, and Qualified Exchange Services, Inc. (QES).

Individual defendants include Donald Kay McGhan, Jim J. McGhan, Dean A. Koch, Nikki M. Pomeroy, Albert Conton, Peter John Demarigny, Kyleen M. Dawson, and Megan L. Amsler.

Donald Kay McGhan, 73, was the founder, chairman, and president of the McGhan Medical Corporation, maker of silicone breast implants and for many years one of the Santa Barbara’s top employers. McGhan left the company, now called Inamed Aesthetics, in 1998, and the company later settled a fraud suit filed by the Securities and Exchange Commission alleging that McGhan had filed false financial statements that misled investors.  McGhan himself paid a $50,000 fine to the SEC.

Additional corporate defendants include Capital Reef Management Corp., Cennedig LLC, Medicor LTD, International Integrated Industries LLC, Ventana Coast LLC, and Sirius Capital LLC.

The plaintiffs also claim that major financial firms Citigroup, Salomon Smith Barney, and UBS Financial Services participated in the scheme.

There is also an ongoing criminal investigation.

You can see the complaint here.

Our advice:

If you’re planning to do a 1031 exchange, make sure that you perform due diligence in your choice of a QI or exchange accomodator, make sure that the QI is bonded, and make sure that you work with an experienced tax advisor and attorney who can help you navigate the 1031 exchange process. 

And, as we’ve said before, it is imperative that the Federation of Exchange Accomodators (FEA) work more closely with state and federal authorities to establish regulations for QIs that will restore and maintain public confidence.

UPDATE:

A $23 million settlement has been reached with UBS Financial Services, one of the defendants in the plaintiffs’ class action lawsuit.  You can read our post about the settlement here.