Tag Archives: criminal law

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.

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FBI Hits Mortgage Fraud with “Operation Malicious Mortgage” — 400+ Indictments and the Arrests of Two Bear Stearns Execs

The FBI announced today that the Justice Department’s crackdown on mortgage fraud has resulted in more than 400 indictments since March — including dozens over the last two days.

Those arrested run the gamut of players in the mortgage industry, including lenders, real estate developers, brokers, agents, lawyers, appraisers, and so-called straw buyers.

The Department of Justice’s name for the crackdown is “Operation Malicious Mortgage,” which it describes as “a massive multiagency takedown of mortgage fraud schemes.”

According to the FBI, the on-going “Operation Malicious Mortgage” focuses primarily on three types of mortgage fraud — lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes.

“To persons who are involved in such schemes, we will find you, you will be investigated, and you will be prosecuted,” said Federal Bureau of Investigation Director Robert Mueller. “To those who would contemplate misleading, engaging in such schemes, you will spend time in jail.”

In its statement, the FBI said that “Among the 400-plus subjects of Operation Malicious Mortgage, there have been 173 convictions and 81 sentencings so far for crimes that have accounted for more than $1 billion in estimated losses. Forty-six of our 56 field offices around the country took part in the operation, which has secured more than $60 million in assets.”

While most of those indicted so far are relatively small players in the industry-wide fraud crisis, Mueller today repeated his earlier promise that federal authorities are not ignoring the major players in the mortgage industry, but are investigating some “relatively large corporations” as part of its sweeping mortgage-fraud probe, including some 19 large companies, including mortgage lenders, investment banks, hedge funds, credit-rating agencies and accounting firms.

Most of these corporate fraud investigations, said Mueller, deal with accounting fraud, insider trading, and the intentional failure to disclose the proper valuations of securitized loans and derivatives.

The FBI’s announcement of Operation Malicious Mortgage coincided with the indictment and arrest in New York on Thursday of two former Bear Stearns managers, Ralph R. Cioffi and Matthew Tannin, who are charged with nine counts of securities, mail and wire fraud resulting in $1.4 billion in losses on mortgage-related assets.

According to the New York Times,  Cioffi and Tannin “are the first senior executives from Wall Street investment banks to face criminal charges, and the investigation by federal prosecutors based in Brooklyn is likely to become a test case of the government’s ability to make successful prosecutions of arcane financial transactions.”

“This is not about mismanagement of a hedge fund investment strategy,” said Mark J. Mershon, the head of the New York office of the Federal Bureau of Investigation at a news conference Thursday afternoon. “It’s about premeditated lies to investors and lenders. Its about the defendants prostituting their client’s trust in order to salvage their personal wealth.”

 

$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.

Property of 1031 Exchange Scammer Ed Okun Goes on Sale

High-end retail complex properties in Kansas and Texas owned by the notorious Edward H. Okun have been put up for sale by a federal bankruptcy trustee.

The properties are the 1.1 million square foot West Oaks Mall in Houston, Texas, and the 587,512 square foot Salina Central Mall in Salina, Kansas.

Okun is alleged to be behind the 1031 exchange scam run by The 1031 Tax Group (1031TG) that defrauded thousands of people out of millions of dollars.

Okun was arrested in Miami, Florida, last month and charged with mail fraud, bulk cash smuggling, false statements, and forfeiture from a scheme to defraud and obtain millions of dollars in client funds held by The 1031 Tax Group. 

Those who were defrauded by Okun’s 1031 Tax Group had hoped to recoup some of their missing funds from Okun’s remaining assets — including the West Oaks Mall and the Salina Central Mall — which were purchased from monies allegedly taken from victims in the 1031 exchange scam.

But the Okun-controlled companies that owned the malls declared Chapter 11 bankruptcy in October. 

It is now unclear whether the proceeds from the sale of the properties would go Okun’s 1031 exchange scam victims.

Both properties apparently have a long line of creditors.

The trustee in the bankruptcy case has hired Keen Consultants, the new real estate division of KPMG Corporate Finance, to market both properties.

You can read our earlier post on Okun and his 1031 exchange scam here.

 

 

Mortgage Fraud Will Hit $2.5 Billion in 2008 — But Just Wait Until the Government Starts Giving Out Money

A new report by Tower Group, a research firm focusing on the global financial services industry, warns that losses from mortgage fraud will reach $2.5 billion in 2008, with comparable losses continuing in future years.

According to Tower Group, “Falling home prices and inappropriate mortgage underwriting have grabbed the headlines and much of the blame for mortgage credit woes in recent months. But the significant rise in mortgage fraud over the past 10 years is another important trend.”

“Mortgage fraud is difficult to track and takes many forms – for example, fraudsters cheating borrowers out of their properties with false promises of foreclosure avoidance or using the identity of a real person (often without his or her knowledge) to fraudulently purchase one or more properties.”

We think that the Tower Group figure of $2.5 billion falls far short of the mark.

When the federal government finally decides how it is going to help bailout homeowners — and we’re sure that it will, no matter who is elected president in November – it will create even greater opportunities for fraud.

Once the government puts billions of dollars up for homeowners facing foreclosure, the mortgage scammers will come crawling out of the woodwork to take advantage of the program.

They’re probably already working on the details…

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.

U.S. Court Rips Subprime Lender as “Ticking Time Bomb” — Faults New Century Executives and Big Four Auditor

The Final Report in the federal bankruptcy proceedings involving subprime mortgage lender New Century Financial Corp. was made public today by the United States Bankruptcy Court for the District of Delaware.

You can read the Final Report here.

Following an investigation that began in June 2007, the 550-page report reviews the accounting and financial reporting practices, loan origination operations, audit committee and internal audit department, and system of internal controls of New Century, once the second-largest originator of subprime home loans in the U.S.

According to the report, the now bankrupt mortgage lender used improper accounting practices while making risky loans, creating “a ticking time bomb” that led to the company’s collapse.

The New York Times has called the report “the most comprehensive and damning document that has been released about the failings of a mortgage business.”

The report states:

“New Century had a brazen obsession with increasing loan originations, without due regard to the risks associated with that business strategy.”

“The increasingly risky nature of New Century’s loan originations created a ticking time bomb that detonated in 2007.”

“Senior management turned a blind eye to the increasing risks of New Century’s loan originations and did not take appropriate steps to manage those risks.”

In one example cited in the report, New Century understated by more than 1000 percent the amount of money it needed to have on reserve to buy back bad loans. As a result, it reported a profit of $63.5 million in the third quarter of 2006, when it should have reported a loss.

New Century also failed to include the interest that it was obligated to pay to investors whenever it was forced to buy back bad loans.

In addition, the report concluded that New Century’s accounting firm, KPMG LLC, one of the Big Four accounting firms, actively enabled New Century’s improper accounting practices. 

Court-appointed examiner Michael J. Missal observed that “As an independent auditor [KPMG is] supposed to look very skeptically at any client, and here they became advocates for the client and in fact even suggested some improper accounting treatment that ultimately started New Century down the road it’s taken.”

The improper accounting also led to higher bonuses for New Century executives.

New Century once billed itself as “A New Shade of the Blue Chip.”

Creditors of New Century now say they are owed $35 billion.

The former subprime lending giant’s stock peaked at nearly $65.95 in late 2004 — on Wednesday it was trading at a penny.

You can read New Century’s Chapter 11 Bankruptcy filings here.

New Century is being sued by hundreds of investors and remains the target of a federal criminal investigation.