Tag Archives: Edward Okun

$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.

Advertisements

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.

 

 

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.

Man Behind 1031 Exchange Scam Indicted for Fraud

The long awaited indictment of Edward H. Okun took place yesterday. 

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

Okun was arrested last week in Miami, Florida, and charged yesterday by a federal grand jury in Richmond, Virginia, with one count of mail fraud, one count of bulk cash smuggling, and one count of false statements and forfeiture.

According to the indictment, from August 2005 through April 2007, Okun used 1031TG and its subsidiaries, all owned by Okun, in a scheme to defraud clients of millions of dollars through false pretenses.

The indictment alleges that 1031TG promised clients that their money would be used solely to effect 1031 exchange as outlined in the exchange agreements. Instead, Okun is alleged to have misappropriated approximately $132 million in client funds to support his lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds.

The indictment also alleges that Okun instructed employees to withdraw $15,000 in cash from Investment Properties of America’s (IPofA) bank account, a company owned by Okun, and smuggle the cash to his personal yacht on Paradise Island in the Bahamas to avoid federal currency reporting requirements; and that Okun made material false statements under oath before the U.S. District Court for the Eastern District of Virginia relating to conversations he had with the chief legal officer of IPofA.

Federal prosecutors are seeking the forfeiture of all funds and assets owned by Okun that were derived from or connected to the misappropriation of approximately $132 million in funds held by 1031TG and of all funds and assets traceable to the $15,000 in cash he instructed to be smuggled to his yacht in the Bahamas.

If convicted of all the charges in the indictment, Okun will face a maximum of 30 years in prison and fines.

1031TG is only one of several QIs that have been in legal trouble in the past year, leaving investors with millions of dollars of losses.

The Federation of Exchange Accommodators, the qualified intermediaries’ industry-trade group, requires background checks of all members except those that are subsidiaries of publicly traded parent corporations. The FEA says it is working with the states and may reach out to federal regulators about enhancing oversight of the business. 

Especially in light of the erosion of investor confidence in the credit, banking, and mortgage industries, we think that oversight of 1031 exchange QIs is long overdue.

UPDATE:

For our post on the sale by a bankruptcy trustee of Okun’s West Oaks Mall in Houston, Texas, and Salina Central Mall in Salina, Kansas, click here.