In what is easily, the most compelling and worrisome story to strike since 1031 Tax Group empire came crashing down, a victim of this fiasco has shed some light on the terrible situation at hand.
Elizabeth Callanan, one of 350 victims of 1031 Tax Group empire, sent the following email in response to my article on “1031 Exchange Due Diligence: Is Bigger Better When Choosing Your Qualified Intermediary?.” I found her story and information extremely important; I hope other victims of this type of heart ache will stand up and be heard, use this information to their benefit, and report back here in order to keep the flow of information on-going.
“Elizabeth H. Callanan | TCallanet@aol.com | IP: 205.188.116.6
- As one of the 350 victims of Mr. Edward H. Okun and the bankruptcy of his 1031 Tax Group, I’ve been reading articles on 1031’s posted here and elsewhere closely. For the record, we did our “due diligence” on Security 1031 Services, LLC (one of the “roll up” 1031’s Mr. Okun had quietly acquired in the two years leading up to this bankruptcy. I say “quietly” because his acquisition of the long term, well known, reputable 1031’s across the country was not at all evident to those who regularly used their services (since he kept all their management teams, including the former owners, in place), nor was his eventual insistence that they transfer their exchange funds (actually held by them in separate accounts identified by each exchanger) into a comingled account from which he then liberally “borrowed” for his own purposes. Security 1031 Services was recommended to me by my real estate attorney as a reputable company with which he had done multiple transactions over the years with no problems (several in the months just prior to the bankruptcy). Security 1031 Services was a member, apparently in good standing, of the FEA (I visited their website as well). I’m not at all sure what that membership or FEA “certification” actually implies, since their only response seems to have been to quickly delete the names of the bankrupt affiliates from their website and otherwise disavow them. It regularly taught 1031 seminars to real estate groups and law schools (which I found on those websites not on Security 1031 Services’ website). It had a fidelity bond for $10 million (the relevance of which is questionable since I had no way of knowing the size of the outstanding exchanges held by Security 1031 Services that bond was intended to cover, but it also seems Mr. Okun must be charged with fraud or other criminal activity in order for them pay off, and in a bankruptcy case, they pay the “estate” whose resources may get distributed first to everyone BUT those of us whose exchange funds constitute the 1031 Tax Group’s only apparent assets. (In truth the 1031 Tax Group’s only “assets” appear to be a pile of worthless unsecured IOU’s for $135 million.) As to advice posted here that the exchangers each insist that their signatures be required to make any transfers to ensure “control” of the exchange funds, my attorney and a close reading of the IRS 1031 regulations would that this would nullify the exchange since the IRS specifically requires the exchanger to surrender all such “control.” When the IRS issued its 1031 regulations requiring that taxpayers surrender control of their sales proceeds to a “Qualified Intermediary,” an industry those regulations created, they should have prescribed as well the oversight responsibility and regulations governing that industry. Their continuing failure to do so has left at least 350 of us reeling and probably put a stake in the heart of the 1031 exchange industry since, despite protests from various 1031 Qualified Intermediaries on this website and elsewhere, there doesn’t appear to be any certain way of guaranteeing the security of those funds.Jun 16, 10:36 AM” — [ Edit | Delete | Unapprove | Approve | Spam ] — 1031 Exchange Due Diligence: Is Bigger Better When Choosing Your Qualified Intermediary?
A sad and compelling story but one to learn from.
The comment that dual signatory power will jeopardize and exchange is not correct and I refer you to Revenue Procedure No. 2003-39 where such a system was approved.
That concern is a myth that many QIs want to continue, and is much like earning interest on the funds held. Some QIs still tell customers that they, not the customer, must get the interest when nothing could be further from the truth. There is NO reason today why you should not get 100% of ALL interest earned on your funds.
The real lesson here is to make sure that your legal, tax and real estate advisors are exchange experts. Not merely ones that occasionally get involved in exchanges but ones that handle exchanges day in and day out.
Also, never rely solely upon information given you by a QI, but check it out with these exchange experts first. Check and double check before making any move.
Comment by Rob Egenolf — June 21, 2007 @ 3:19 pm |