Okun Victim Speaks Out on LandAmerica: 1031 Exchanger’s Warning A Must Read

Due Diligence Warning: The following article is in it’s entirety a comment from a deansguide reader. I am neither an attorney or practicing investment professional. I support the victims of any 1031 exchange debacle yet the following are the opinions and thoughts of Beth Callanan solely and not necessarily supported in it’s entirety by dean guadagni or deansguide–but if you have read this blog you understand my thoughts on the 1031 industry. When considering any investment, always perform your due diligence first and protect yourself at all times.

Important Note: I assume and have seen some evidence that many 1031 exchange companies are viable, honest, and worthy companies. Not all 1031 exchangers or Qualified Intermediaries are suspect. Many people have built their life and reputation in this industry. It is the sleaze bags like Ed Okun that crush the good name of these other hard working business people.

*President elect Obama please pay attention while you are trying to fix Wall Street consider fixing this industry too.

My #1 Question: While reading this incredible comment sent to deansguide consider the one question I have asked but has never been answered. Why are many exchange companies allowed to invest exchanger monies when their sole purpose as a Qualified Intermediary is purportedly to simply execute the process of an exchange?

What is easily the longest, most detailed and greatest comment in the history of this blog, Beth Callanan one of the 350 Ed Okun 1031 Tax Group Victims, provides a MUST READ for any investor currently in a 1031 exchange or anyone consider this instrument.

What you are about to read will shock you, it will sadden you, it will anger you, and it will have your head shaking in disbelief. Normally I edit such long comments. But in this case I want to give Beth’s comment the full benefit. The only editing of this text was to underline, bold, or change font colors to bring out information.

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Beth Callanan’s comment:

“When will the IRS and the US Department of Justice (which, I understand, oversees bankruptcy courts) step up to the plate and rectify through regulation and reform the ongoing pillaging of innocent 1031 exchange victims first by unscrupulous 1031’s (or hilariously misnamed “qualified” intermediaries) and then by the bankruptcy courts wherein they all seek refuge once they have absconded with (Southwest Exchange, the 1031 Tax Group) or squandered (LandAmerica, the most recent case) the exchange funds entrusted to them? The following excerpts from documents filed in relation to the “bankruptcy” of LandAmerica’s 1031 are all too familiar and the fate of those exchangers all to painfully obvious to those of us who have already been there.

1031 Exchangers should beware:

1) Not to be lulled into assuming that the 1031 business of a corporation or entity whose other functions (title company, insurance, banking) are otherwise subject to federal regulation is also subject to regulation or oversight. Like LandAmerica, the corporate structure is such that the 1031 aspect is sufficiently separated to NOT be subject to such regulation.

2) Not to expect that any so-called “fidelity bonds” (endorsed by the FEA) presented to unsuspecting exchangers as assurance of the security of their funds in the event of “error or ommission” or criminal malfeasance, even where the face value greatly exceeds the amount of their exchange fund deposits, will be available to them to cover any loss of their funds since policies pay the 1031 (and become part of the “estate” in any bankruptcy), not the exchanger, and in any case the insurers will insist that the “per occurrence” terminology refers to the total loss of funds, not just their individual funds. (Since exchangers can’t possibly know the total amount of funds on deposit with the 1031, they can’t possibly know if the face value of coverage is adequate to cover them and, if the funds go to a bankruptcy estate, they can expect that the total will go to cover “administrative fees” of that court in any case.)

3) that even a segregated account may not protect them. While posters to this site have discussed the advisability of insisting that your exchange funds be deposited in a segregated (NEVER COMMINGLED!) account associated with your name and Tax ID number, and suggested that any transfers require the signature of your attorney or a bank officer (to implicate the bank in the liability for any improper transfers), as is clear from LandAmerica’s filings (and the bankruptcy court’s track record in the Okun 1031 embezzlement), the court may nevertheless insist that your exchange funds are property of the bankruptcy estate and thus available to pay its own “adminstrative fees.”)

4) that their funds are deposited in secure bank accounts and not invested at the discretion of the 1031 in any other money making scheme (the supposed benefit of which the exchanger will never see in any case).

5) even deposit in a banking institution is problematic since the FDIC coverage limit, were the bank to go under (an increasingly likely possibility in this economic climate), is $250,000 per depositor. If the 1031 is the “depositor” then any exchange funds in their name are clearly at risk since they’d be expected to have millions on deposit at any given time — and if the exchanger is considered the depositor anything over the FDIC limit is at risk. How does the FEA propose to protect exchangers given that scenario?

6) bankruptcy court will almost certainly guarantee the absolute loss of their funds. Rather than construing exchangers of 1031’s in bankruptcy as victims of negligence, malfeasance or criminal activity or their exchange funds as “held in trust” and therefore exempt from inclusion in debtors’ estates (as the exchange agreements in the case of Okun’s 1031 Tax Group explicitly stated), they have so far relegated exchangers to the status of “unsecured creditors” or investors and thus the last in line to receive any of the funds actually retrieved from the increasing number of 1031 failures.

The bankruptcy process is beyond broken and in need of reform. So far (18 months into it), the costs of Okun’s having put his 1031’s into bankruptcy are $24 million against which less than $2 million has been retrieved from the liquidation of his various “assets.” (The court will claim that it has “retrieved” $10 million, but nearly $8 million of that amount were exchange funds held by a bank in Colorado that Okun had not managed to steal – the costs of the court action to seize those being among the “admin fees” exchangers funds have already been used to partially offset adding the grossest insult to that injury!)

Excerpts from recently filed LandAmerica documents:
(anything in italics are my notes — boldfacing was added by me for emphasis)

From the affadavit of G. WILLIAM EVANS, CHIEF FINANCIAL OFFICER OF LANDAMERICA FINANCIAL GROUP, INC. AND VICE PRESIDENT
OF LANDAMERICA 1031 EXCHANGE SERVICES, INC., IN
SUPPORT OF CHAPTER 11 PETITIONS AND FIRST DAY PLEADINGS

Footnote page 10 (of 17):
3 LES expects that there may be competing claims made against and disputes regarding the Exchange Funds (especially those that have been commingled), including whether such funds constitute property of the estate. LES intends to seek a determination from the Court as to the appropriate characterization of such funds.

(Note to potential exchangers – be sure your funds are in SEGREGATED ACCOUNTS, and not allowed to be commingled, but also note that even those are segregated are not assured protection unless some signature other than the 1031 is required to transfer them — ideally a bank officer’s, so if they are moved improperly the bank’s assets are liable to cover your loss. However, in another cautionary development the outcome of which may put ALL exchange funds at risk, even those in traceable segregated accounts, LES in its bankruptcy petition has apparently already made the claim that even the segregated account funds are their property and not the property of the exchangers (see the Adversary Motion below.) )

(ii) Unregulated Operations (footnote “2″)

(Note: LES, LandAmerica’s 1031, “LES”, appears correctly under “Unregulated Operations”)

(Footnote “2″ reads as follows:
“2. Although not regulated by a State Department of Insurance, many of LandAmerica’s “unregulated” subsidiaries are in fact regulated by different types of State or Federal agencies.”)

Unfortunately, as we’ve all discovered, the 1031 industry is TOTALLY UNREGULATED by any federal government entity, least of all the IRS whose regulations created this monster, and hardly regulated by the few states (Nevada and California?) that have made even a feeble attempt to promulgate regulations that would demand licensing, accountability, transparency, criminal or civil penalties or other meaningful oversight.

9. In addition to underwriting title insurance, LFG subsidiaries provide, among other things, appraisals, home inspections, and warranties for residential real estate transactions and perform specialized services primarily to its national and regional mortgage lending customers, such as real estate tax processing, flood zone determinations, consumer mortgage credit reporting, default management services, and mortgage loan subservicing.

10. LES, one of the Debtors, is one of these subsidiaries. Prior to the Petition Date, LES operated as a “qualified intermediary” under section 1031 of the Internal Revenue Code (the “Tax Code”). Generally, the Tax Code imposes taxes when property is sold or transferred and a gain is realized. Pursuant to section 1031 of the Tax Code, if a taxpayer adheres to certain guidelines, then all or a portion of the gains from the disposition of business or investment property can be deferred or reinvested into a new replacement property. These deferred gains, as well as the gains from the new property, are not taxed unless and until the new property is transferred and fails to qualify for tax deferral. To qualify for such tax deferral, the taxpayer must structure the transaction as an exchange of one property for another of “like kind.” 1031 exchanges typically are facilitated by a qualified intermediary, like LES.

11. During the course of its operations, LES entered into agreements (“Exchange Agreements”) with its customers whereby it would acquire the net proceeds of the sales of relinquished properties (the “Exchange Funds”) in accordance with requirements of the Tax Code in order to facilitate a like-kind exchange. Pursuant to the Exchange Agreement, LES takes sole and exclusive possession, dominion, control and use of all Exchange Funds, including interest, if any, earned on the Exchange Funds until the earlier of the consummation of a like-kind exchange or such other date or event as provided in the Exchange Agreement (as applicable, the “Termination Date”). The Exchange Agreements further provide that a Customer shall have no right, title, or interest in or to the Exchange Funds or any earnings thereon and that a Customer shall have no right, power or option to demand, call for, receive, pledge, borrow or otherwise obtain the benefits of any Exchange Funds, including interest, if any, earned on the Exchange Funds except that the balance of Exchange Funds, if any, held by LES after applying such Exchange Funds in accordance with the Exchange Agreement shall be paid to the Customer on the applicable Termination Date. As of the Petition Date, the Exchange Funds maintained by LES included funds acquired from approximately 450 customers pursuant to separate Exchange Agreements. While not the norm, approximately 50 of the Exchange Agreements (each, a “Segregated Exchange Agreement”) required LES to segregate the applicable Exchange Funds (the “Segregated Exchange Funds”). The remaining approximately 400 Exchange Agreements have no segregation requirement.

Segregated accounts SHOULD be “the norm!”

400 new innocent exchangers are about to enter bankruptcy hell wherein they will find the lifesavings they entrusted to their 1031, to the extent they weren’t already squandered on bad investments by LES, dissipated over months/years of self-perpetuating litigation the real point of which appears to be to tally up billable hours and “administrative fees” of court appointed functionaries to the point that they quickly outstrip any potential recoupment of their exchange funds. Case in point: as of September 2008, nearly 18 months after the 1031 Tax Group (Ed Okun’s grand embezzlement scheme) filed for bankruptcy, his 350 victims have received nothing, the court has retrieved less than $2 million from liquidating Okun’s assets but has toted up and filed claims for $24 million in “administrative fees” and they stand first in line with their hands out before any of Okun’s (or LES’ )victims will receive a dime!)

(ii) LES

16. As of the Petition Date, approximately $138.6 million in Segregated Exchange Funds were maintained in segregated LES accounts. These funds equal or exceed the claims of customers that are a party to one or more Segregated Exchange Agreements. In addition, as of the Petition Date, LES maintained approximately $46 million backed by investments in government treasury bonds and approximately $201.7 million (par value) in auction rate securities. These assets, which represent Exchange Funds acquired from approximately 400 customers (the “Commingled Customers”), are commingled. In the aggregate, Commingled Customers hold claims equal to approximately $191.7 million against LES.

If I’m reading the foregoing accurately, 50 exchangers had deposited $138.6 million with LES in segregated accounts which miraculously LES still has on deposit so they may actually see their funds again if they don’t get sucked into bankruptcy court and that court doesn’t acquiece to LES’ claims that even the segregated accounts are their property, not the exchangers’, as claimed in LES’ bankruptcy petition. In the Okun case, the bankruptcy court actually authorized the attorneys for the Debtors to pursue the exchange funds still held by the Colorado Capital Bank arguing that those funds were the property of the 1031, not the exchangers — some of which have since been used to pay adminstrative fees of the bankruptcy proceeding! The cozy “settlement” negotiated by the debtors attorneys with those of the bank provided for the bank and its attorneys to receive more than $800,000 in fees and an additional quarter million to cover future cost that might arise — all of which will come out of exchangers’ own funds — effectively including the costs of both sides of that litigation! Only in bankruptcy court would this not seem a huge step “Through the Looking Glass”!).

Of the $191.7 million LES owes its other 400 exchangers whose funds were “commingled,, it seems to have on deposit only $46 million (about 24% of what it owes those exchangers) having effectively blown the balance ($145.7 million) on a get rich quick scheme for its own benefit (does anyone seriously believe this investment of exchanger funds was intended to benefit the exchangers as LES will no doubt try to argue? — aka the Okun argument, which his defense attorneys appear poised to make in criminal court — “I was trying to get my clients a better return on their exchange funds, Your Honor…!” — pulleez!) Since those investments effectively have no monetary value today (see their sad, sad tale below), the bankruptcy court functionaries will certainly file motions to seize the $46 million because it represents “commingled accounts” and is thus considered easy pickins with which to pay their administrative fees…

Page 8
Since 2002, LES invested a portion of the Exchange Funds transferred to it in investment grade securities rated A or stronger at the time of the investment, including auction rate securities (“ARS’s”) backed by federally guaranteed student loans. An ARS typically is a debt instrument with a long-term nominal maturity for which the interest rate is regularly reset through a dutch auction. Until earlier this year, banks pitched ARS’s to corporations and wealthy individuals as highly-liquid and safe alternatives to cash, and LES’s investment goals on the Exchange Funds were to maintain the full liquidity necessary to meet customer claims.

19. The ARS’s purchased by LES, which were sold to it by certain financial institutions, were highly liquid for many years. Unfortunately, as has been widely publicized, the ARS market froze earlier this year and LES has been unable to liquidate the ARS’s previously purchased at any price near their par value. Indeed, although the aggregate amount of the cash and par value of the ARS’s held by LES exceeds the value of all funds received from LES’s customers, LES’s inability to sell, or borrow against, these securities ultimately precipitated its decision to cease additional customer transactions and terminate operations.

The boldfaced lawyerly-crafted sentence above is one of my favorites — a carefully parsed deliberately obtuse way of saying “Through greed and stupidity, we lost nearly $147 million of exchangers’ funds entrusted to us.” (Not to mention “…and what we didn’t lose, we’re now claiming belongs to us”!)

The following is excerpted from an Adversary Motion filed by Lubexpress, a company, which apparently had $9 million in what it thought was a segregated exchange account with LES that it is trying to get returned (good luck to them…As a non-lawyer myself, but based on the judicial abuse to which we Okun bankruptcy victims have been subjected, seems to me other LES segregated account holders would be well advised to join this motion as a class to minimize their individual costs, lend strength and expedite their own claims. Time is of the essence, you poor things…!):

15. On the Petition Date, counsel for LES stated on the record at the first day hearing
that LES (i) does not intend to consummate the Section 1031 exchanges that are the subject of its executory exchange agreements, and (ii) believes that the funds it is holding in both segregated and commingled bank accounts constitute property of LES’s estate. Further, the Court has entered an order prohibiting LES from, among other things, transferring funds from such bank accounts. These events constitute a breach of the Exchange Agreement.

19. LES is holding the Funds in trust for the Plaintiffs. LES and the Plaintiffs had the
capacity and intent to enter a trust agreement and the Exchange Agreement constitutes such agreement. The relinquished properties first constituted the res of the trust, which were then substituted by the Funds. The Funds are segregated in the Accounts and are clearly identifiable. LES is the trustee and the Plaintiffs are the beneficiaries of the trust.

20. Under the Exchange Agreements, the Plaintiffs and LES affirmatively agreed that
the Funds would be held for the benefit of the Plaintiffs. Section 6(b) of the Exchange
Agreement states that “LES IS ENTERING THIS EXCHANGE AGREEMENT SOLELY FOR THE PURPOSE OF FACILITATING TAXPAYER’S EXCHANGE OF THE RELINQUISHED PROPERTY FOR THE REPLACEMENT PROPERTY.”

21. Section 6(d) of the Exchange Agreement states that “LES shall only be obligated
to act as an intermediary in accordance with the terms and conditions of th[e] Exchange Agreement and shall not be bound by any other contract or agreement, whether or not LES has knowledge of any such contract or agreement or of its terms or conditions.”

22. Section 3(a) of the Exchange Agreement sets forth the requirement that LES hold
the Funds in the Accounts associated with the Plaintiffs’ names and taxpayer identification numbers.

23. Section 3(b) of the Exchange Agreement provides that the Plaintiffs get the
benefit of the accrued interest and assume the responsibility to pay any income tax on the interest.

24. Nothing in the Exchange Agreement confers to LES any beneficial interest in, or
risks associated with ownership of, the properties or the Funds. Rather, the Exchange
Agreement requires LES to accept the relinquished properties, transfer them to the buyers, hold the proceeds for 180 days or less, accept title to the acquired properties, and then transfer them to the Plaintiffs.

25. Section 7 provides that LES’s compensation for this trustee service is limited to a
$1,200 plus reimbursement of expenses. In contrast, the Funds exceed $9 million.

26. By reason of the foregoing, the Plaintiffs seek a declaratory judgment under
section 541 of the Bankruptcy Code that LES is holding the Funds in trust for the Plaintiffs and are thus not property of LES’s estate.

If I had any money left with which to bet (no longer a temptation thanks to Ed Okun and the Bankruptcy Court of New York’s Eastern District), I’d lay odds that the bankruptcy court will deny the motion since by LES’ own admission, the lion’s share ($138.6 million) of the exchange funds it currently holds are in those segregated accounts (plus a pitiable 24% ($46 million) of what it owes the poor exchangers whose funds were “commingled.”) Since bankruptcy court is a self-financing enterprise, all the court appointed functionaries will fight valiantly to make sure that $138.6 million is construed as assets of the “estate” and available to pay their salaries and expenses over the next several years thus fully insulating them from the nation’s current economic woes while plunging the innocent exchangers, whose funds they rightfully are, into financial ruin.

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22 thoughts on “Okun Victim Speaks Out on LandAmerica: 1031 Exchanger’s Warning A Must Read

  1. I am one of the latest victims in this unbelievable fraud by LandAmerica. I want to say thank you, thank you, to the author of the article “Okun victims speak out on LandAmerica”, for the concise, if depressing, assessment of the situation. I personally would rather be informed than befuddled, or deluded. I have circulated your article to as many of the other victims as I can find. If you are a victim and want to get in touch with others who are taking action got to: landam1031exchangers@googlegroups.com

    People really need to be warned that anyone planning such a transaction is completely without protections or safeguards under any current law. Once caught up in purposeful fraud, or bankruptcy by the 1031 “accomodator”, you will likely never get your money back, or get pennies on the dollar. The victims of this blatant money grab are in for a huge, costly, gut-wrenching fight in a system they do not understand and cannot afford. Senators do not return phone calls, Congressmen are “not available” ( all but Senator Dodd, thank you very much!) the IRS has no answers, but attorneys are very happy to talk with you…for $300 to $500 per hour…plus expenses….so take warning and do not believe anything you are told by an exchange rep…they are probably lying to you and will not be held responsible even if they are. My money was taken in by LandAmerica 5 business days before they closed their doors. They did not even send me my paperwork, I have had to request it from the title company. These people were grabbing all the money they could and knew that they were going to declare bankruptcy, but we, their victims, will be held to contracts that they do not have to honor, and that the parant company supposedly fully guaranteed. My business is probably sunk, my health insurance, which I must have due to diagnosis of breast cancer will probably be lost, and I still have to try and pay a tax bill on money I will probably not ever see, and I may not even be able to write it off as a loss, since the claim won’t be in the same tax year. Mine is only one of the many, many sad stories. I guess I am about to find out if justice is really blind.

  2. The segregated accounts are SUPPOSED to be Bankruptcy remote, at least if it originated in Nevada. The segregated accounts are probably in a bank that is owned by Land America. Go figure.

  3. Government COULD purchase the ARS. They did it for CitiGroup! Why can’t they do it now when tax paying citizens that got screwed would be helped!

  4. This is why transparency is so important for 1031 Exchange funds. If there is a segregated account, there is a monthly bank statement proving it. Every single exchange at Haven Exchange has its own money market account at Union Bank. Each client receives the monthly bank statement proving it. No one has to wonder where their exchange funds are invested and no one has lost a dime. It is still safe to defer capital gains taxes if you choose the right qualified intermediary.

    You should not be required to trust anyone in this regard. It should be right out in the open, where you can see it.

  5. A Surety Bond is available to the clients of Haven Exchange whose exchange funds exceed the $250K per depositor covered by FDIC insurance. The Surety Bond is obtained from the Hartford for a fee of 25% of the interest earned by the funds. The exchanger holds the original. You can’t beat that.

  6. Dorothy,

    Why should an investor have to pay a quarter point for security that should always be guaranteed? Why would any investor consider paying for insurance because the original bond, provided by your company, can not insure the amount of the 1031 exchange. The insurance on most 1031 exchanges are woefully and treacherously inadequate. I just don’t get why a client, who NEVER wants their money touched by a QI before the actual exchange occurs, should have to pay for security on their funds?

  7. Dorothy,

    I would love for Elizabeth Callagnan to jump in and answer your previous comment about transparency. Frankly it is very difficult for any investor to understand what is happening, even with your assurances about account control, and have confidence in an industry when so many QI’s are beginning to fail.

    You may have the answer that secures peace of mind. Unfortunately your industry is fighting the Okun 1031 Tax Group, Southwest Exchange, LandAmerica LES, and now a new failure to be announced soon here, ponzi scheme swindles.

    The most bold move any 1031 exchange company could make is to guarantee the exchange with their own corporate assets against any lost funds incurred through any investments not “approved” by the investor.

    When any 1031 exchange company decides to step to the plate with that kind of coverage or guarantee, they will own the industry–until then consumer confidence will continue to sink.

  8. Dear Dean,

    The Surety Bond is entirely other than a Fidelity Bond. Fidelity Bonds protect you in the event of dishonesty. A Surety Bond is put in place through Union Bank to insure deposits that exceed $250K per depositer as provided by FDIC.

    I would never expect an exchangor to pay for our Fidelity Bond. But if they want insurance against bank failure, which is the only danger they face if the funds are held as cash in a bank, then they can choose to have it fully insured. The placement of the Surety Bond is the choice of the exchangor. They aren’t paying a fee, but rather are giving up a quarter percent of the interest while the funds are held by the bank. Since the interest the funds earn is credited to each account and not to Haven Exchange, the burden of the quarter percent less interest is rightly born by the exchanger.

    Further, Haven Exchange is not worried about Union Bank. They are a very strong bank. But should a customer want this extra security, it is available to them.

    Lastly, the transparency provided by sending the monthly bank statements to the exchangor means that each account can be monitored by its beneficiary.

  9. There is no rhetoric that a QI can spit out that will ever give me confidence in the corrupt business of a QI. They need to all be eliminated so the public can keep their own money in the bank until a new property is found. I personal believe the QI’s days are numbered. Dorothy Zink, if you want to save your industry then you better come up with something better than the promise of a surety bond. HA! Talk to any of the victims of Okun or Southwest to know what we think of insurance companies. They are corrupt, too. How about come up with a solution that does not allow the money to be moved from the bank with out the signature of the exchanger or a trusted attorney or appointed banker. Something, anything different than then BS that we have been given for 2 years. You’re not worried about Union Bank. Well, people weren’t worried about Wachovia or Bears Stearns in the past either. Please do not promote your company to the victims in this industry. Your message is NOTHING different than the lies that we heard from all the other failed exchange companies. . . Southwest, Okun’s mess, LandAmerica and Summit. Please, go away.

  10. Yacotiamo,

    I believe that the 1031 industry, in it’s entirety right now, is so unregulated and unpredictable that I personally would not go near it. For the more daring, who do not need anyone’s opinion, then you must be interested in Dorothy Zink’s opinions. I don’t want Dorothy to go away.

    Instead I invite Dorothy to come up with a much better security blanket for investors. I would like her to consider your comment, one that I believe to be true, and consider the dangers to the investor.

    Forget the insurance company Dorothy. Instead why not put up, dollar for dollar, your company’s monies against any 1031 exchange you will perform. Guaranteeing a 1031 exchange should be a slam dunk as long as Haven Exchange is willing to secure the process with their own funds.

    If the 1031 investor’s monies NEVER leave the account, then how can Haven lose on this security measure? In fact I am willing to bet that Haven would become the leader in 1031 QI transactions, as would any other QI, if they themselves were willing to go dollar for dollar with the investor in securing the transaction.

    What do you all think about that kind of security measure? The investors’ monies never leave the original account. If they do and those investor’s monies are invested in something that goes belly up, then the QI replaces the investors’ monies automatically.

  11. Dear Yacotiamo,

    It hurts me to hear the pain your words reflect and so it is with compassion I must overlook the accusatory tone of them. I remind you that my clients have not lost a penny, nor have they given up the ability to monitor the whereabouts of their funds throughout their exchanges. Had you placed your funds with Haven Exchange, you would still possess them in effect, and could complete your 1031 Exchange.

  12. Dear Dean,

    When you deposit money in a bank, the bank, no matter how large, never matches your deposit dollar for dollar. There is not security such as that in this realm of existence. All you can do is find the strongest, most cash heavy bank you can. Further, a person with 200 million dollars in cash would not concern themselves with the day to day workings of acting as a qualified intermediary. I love my job, but it’s not THAT interesting.

    It is possible to set up an exchange fund account so that Union Bank will not move it without the notorized signature of the exchanger. Thank you, Mr. Yacotiamo, for your brilliant suggestion. It would cause a delay in the funding due to the bank waiting to receive the original notorized signature from the exchanger, but lots of people would think it was worth it. Today I am altering our documents to allow our future clients to demand this additional security. Thanks again, Mr. Yacotiamo, for your assistance in making Haven Exchange the best.

  13. Dorothy,

    I find it interesting that you would point out that a person with $200mil would not concern themselves with the day to day workings of a 1031 exchange. How do you think that person amassed $200mil? By giving it to the IRS?

    Furthermore a bank does not remove a person’s funds from a bank account, checking account, or savings account. In the majority of the 1031 cases, if not all, the investor’s money is invested by the QI. How exactly is that secure?

    Whether you love your job or find it “that interesting” the fact of the matter is people who could not afford to lose a small amount of money are losing their entire life savings in 1031 exchanges. These losses are being incurred by both crimminals like Ed Okun and McGhan but also what we always thought to be LEGITIMATE businesses with good reputations like LandAmerica.

    Dorothy maybe your 1031 services are completely safe. Maybe Union Bank is completely safe. But those are not facts I would be willing to bet my life savings on at this time. The fact of the matter, for me and this is only my opinion, is I could not risk my retirement nest egg on anything less than guarantees. If a bank or QI is not willing to guarantee my money, I will wait on this investment vehicle until the government aka IRS decides to either abolish the industry all together or regulate it so well that there are no loop holes for people’s hard earned monies to escape.

    The reality is that no guarantee is as safe as allowing me to handle my own money with no middle man.

  14. You are missing my point that the exchange funds held by Haven Exchange are not invested, but are held as cash in an FDIC insured money market account that is monitored by our customer. My meaning about the 200 million and my job is that if I had a sum as large as that, I would retire. If I allowed my corporation to recognize that much profit, the taxes would be staggering. That would be very poor management. On the other hand, I wish I had such a problem.

    No one is currently guaranteeing your life savings, not matter where you have them. It seems we are only guaranteed death and taxes in this life. Even if you’ve stuffed your mattress with your life savings, a thief could break in and steal it.

    I agree that there ought to be regulation imposed upon the industry. All qualified intermediaries should be compelled to treat the funds as we do.

  15. Dean,
    The 1031 Raw deal is that the industry as a hole is unregulated and clearly should be. All those people that lost money it’s beyond horrible. Worse yet they’re most likely going to owe taxes on the gain with no money to pay the tax bill with. None of the companies that went under had any guarantees on the funds and the exchanger didn’t even know how the money was kept. Title Company owned QI’s brag how they are back up by the Big Bad title company. (Kind of like Enron) Even now I wonder about the other title company’s in-house QI’s.( First American, Stewart, Fidelity, Old Republic, Ect…) Is the Big Bad title company going to back them up the same way LandAm backed LES? Maybe title companies should stick to writing title insurance! Just think LES brought down LandAmerica about 3rd largest title company in the US. Not only did the 400+ exchangers get screwed but all people that work in Title and Escrow got screwed because of there QI. I’ve heard some of these people were also intimidated to steer the client to use LES instead of offering choices so that the client could choose keeping them neutral and at arms length. In the end these same people lost their jobs because of the way LES was mishandling the money, and rest now work for Fidelity. I wonder if the other title company’s tell their employees to steer the client to use the in- house QI under threat of unemployment? (You know how it goes: “In this market you’re lucky to have a Job”) Now that Fidelity now owns LandAm it now has 42% of the title insurance market, almost sounds like a monopoly.

    Until the IRS says you can control you own money in an exchange, it seems to me that Dorothy’s business model could serve as a regulatory outline on how a QI should operate, since no one is sitting around with an extra 200 million to play QI with. (If I had 200 million I’d be sitting on a beach somewhere with and umbrella in my drink) The way I understand it is her company’s Exchangers Trust Funds are held for the client the following way:
    1. The money is in a U.S. Bank in individual accounts backed by FDIC insurance up to 250K
    2. Any money over 250K has a surety bond issued for the rest for .25% less interest earned.
    3. A bank statement is mail to the exchanger proving the money is there and even earning interest.
    4. A notarized signature to release the funds for the replacement property per the client request.

    Looks good so far

  16. Jack,

    If I didn’t know any better or was a suspicious type, I would guess you are related to Dorothy or her business. Are you? The majority of people who have been ripped off in 1031 exchanges had far more than $250k at stake.

    Insurance companies have proven to be less than ethical in many of the instances. Surety bonds may not cover every single incidence of crimminal actions–but only one. A per incidence coverage is absolutely necessary. In fact if you take into account how hard insurance companies fight individuals on the smallest of claims (ie proof, documentation, and other hoops to jump through,) I find it hard to believe that any insurance company is going to willingly and easily cover an investors $12. 4 million dollar loss like the one suffered by a Silicon Valley Ed Okun victim.

  17. Dorothy,

    Mattress? That’s a thought. Seriously with all you have said, it is still beyond the scope of any investor to wonder if the insurance company is truly going to cover a major life savings loss. The only true guarantee would be if each investor had complete control over his or her exchange, no middle man QI’s involved. In that case if you lose your own money you only have yourself to blame.

  18. Dean,

    No I’m not related to Dorothy, but have been in the real estate industry for 21 years. I know a lot of escrow title and exchange people and know Dorothy well. That doesn’t diminish what I’ve said because a fact is a fact. I would rather not attempt to re-explain. Until the IRS says you can control your funds in an exchange finding the safest way to defer taxes is everyone’s business. Thank you so much for the opportunity to speak.

    • 1) Since the FDIC will insure multiple accounts for $250K so long as they are placed in different institutions (or multiple accounts at one institution, but with restrictions that make those exceptions irrelevant here) Haven Exchange would be providing a better service for their customers if they did not restrict them to Union Bank, but instead allowed them to set up multiple accounts at multiple banks, as an alternative to relying on the safety of The Hartford in an environment where no such institution seems truly safe.
      2) If Haven Exchange goes bankrupt what is to prevent the bankruptcy court from claiming that these segregated accounts are nonetheless part of those it may draw upon? Better segregated than unsegregated, but reread what is said above about Okun/”Colorado Bank” and LandAmerica/Lubexpress. Ms. Zink, I’m addressing this question particularly to you.

  19. The Financial Advisors, Lawyers, and whomever is appointed by the court will feed at the kill of these Ch. 11 companies until it is wasted. I know, I worked at one. They got you and they know it. This breakdown is a must read for anyone going through this nonsense. The judge should cut all professional fees 50% off the bat as a matter of principal. At 22 year old kid is not worth 225 per hour, nor is anyone this side of Jesus Christ worth 900 per hour. Criminal.

  20. Dean,
    I was wondering if JPS Capital is still involved with this case. We have a situation with them in Tampa right now.
    Ralph

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