As to insurance, what should a prospective 1031 client look for in an insurance policy provided by a 1031? The fidelity bonds provided to customers of those acquired by Okun gave false assurances of coverage in the millions, but in fact, like the fidelity bond offered by the Federation of Exchange Accomodators (according to their website), “Q: How does the policy limit under the FEA Fidelity Bond apply to claims?
A: The policy limit applies on a “per occurrence” basis, meaning each separate loss event or series of
related loss events has the full benefit of the policy limit. Losses are usually considered related, i.e. a
single occurrence, if they arise out of the same set of circumstances. The limit does not apply per
customer, per transaction or per account.” While exchangers to whom these Fidelity Bonds are routinely presented as some kind of assurance regarding the security of the funds held by the 1031 would reasonably interpret their transaction as the “per occurrence” covered by the bond value, FEA’s FAQ’s attempt to limit that coverage to each incident and insurers in the case of Okun are already attempting to construe him and his ongoing series of embezzlements from multiple 1031’s he acquired over time as a single occurrence. Since collectively he embezzled $150 plus million, these bonds are wholly inadequate in terms of providing any kind of security to exchangers. So, what should exchangers be demanding to see from prospective 1031’s they’re considering in order to assure themselves the 1031 is in fact a “safe harbor” and their funds will in fact not be absconded with? What regulations is the FEA promoting at any governmental level that would ensure the security of exchanger funds, the integrity of 1031’s, their owners and staff, and what penalties (criminal, financial, etc.) are they proposing in the event there is criminal activity?

With the Ed Okun ponzi scheme winding it’s way through the courts and the latest “mirage” called Vesta Strategies aka Personal Piggy Bank, consumer confidence should have been shattered ultimately destroying the 1031 industry.

Yet that will never happen for one reason and one reason only in my opinion-consumers are unknowing or just unaware. They often perform due diligence but not the right type of investigative due diligence. They then suffer the unthinkable–scam rip offs in a way they never could have imagined.

Even if 90% of the industry is clean, the other 10% threaten the very livelihood you now enjoy.

My hopes are that they hammer anyone engaging in a ponzi scheme 1031 shell game like Okun, McGhan, and now Vesta with massive penalties

The very niche itself is fighting to stay alive.

dean

I certainly agree with you both.

Bill, longevity certainly would seem to be a key in our prospective client’s search for a QI. If longevity is in place, then experienced management and employees should be what carried them thus far. Can anyone say enough for bonding and insurance? Good to hear from someone with such experience in the industry, Bill.

Dean, I could not agree with you more in that dual signatures are a key to security. Certainly it is one extra step for us to take, but in our attempt to provide as much security as possible for our client’s funds, why wouldn’t we? It is time for potential 1031 clients to ask hard questions of the QIs they are considering. If it was my money, I certainly would.

I agree with you on everything but one issue. I have spoken to 14 of the Okun victims directly, Gerald McHale indirectly, and two editors for finacial news sources on this subject: dual signature policies. Everyone from attorneys to prosecutors are convinced that control via a dual signature process is the only way to secure funds.

Insurance must be investigated by consumers to make sure the policies are still valid. In addition a consumer should hire an attorney during their due diligence to make sure the insurance rider carried by the QI is going to cover each incidence to the right monetary levels, and that the language written into the insurance policy actually covers the type of incidence(s) that an Okun created with his ponzi scheme. Thanks for commenting!

dean