 |
A
Sad New Tale of 1031 Intermediary Theft
Gary Gorman, Managing Partner of the 1031 Exchange Experts
And author of the top selling 1031 book “Exchanging Up!”
This article is a sad story about a local company that
set up its own 1031 intermediary. The company and its
related intermediary are both bankrupt and are both
accused of bilking investors of millions of dollars.
One
of the requirements of a 1031 exchange is that you must
use a "qualified intermediary" to handle your exchange,
and hold your exchange funds. With all the proceeds
of every exchange going to intermediaries, you would
think there would be rigorous licensing and regulations
for this industry. But there is not -- not by the Federal
government, nor by any of the 50 States. Not surprisingly,
there have been problems with some intermediaries and
their client's money. I have written a number of articles
alerting readers to the potential problems caused by
this situation, and how to avoid them.
In a still developing case that is being covered extensively
by The Denver Business Journal, Denver-based Mile High
Capital held seminars throughout the United States for
the purpose of enticing individuals to invest in Mile
High's real estate projects. Apparently, Mile High actually
owned very little of the property they were selling.
While approximately 1,000 investors nationwide placed
money with the company, it seems that few of those will
actually receive any property. The bulk of the investment
money was used to fund additional seminars, and it appears
at this point that most investors will probably lose
all, or a substantial amount, of their investment. The
Colorado Securities Commissioner is actively investigating
the company, and has put it under the control of a receiver,
who has placed it into Chapter 11 bankruptcy.
As
a part of their seminars, the company and its speakers
also touted the benefits of 1031 exchanges, apparently
to entice investors to use their 1031 exchanges to invest
in the company's properties. Where the 1031 part of
the fraud began is when the company set up its own company
to act as a qualified intermediary. This 1031 company
shares offices with Mile High. While it's not clear
if their original intent was only to act as an intermediary
for Mile High transactions, the intermediary soon began
soliciting exchanges from the public at large. A Google
search for anything related to "1031 exchanges" during
that time showed the intermediary as a "sponsored link."
Sponsored links are ads by companies that pay Google
to appear at the top of the list when the public does
searches for certain terms. In other words, the intermediary
was soliciting exchanges from the public at large.
From a recent report to the court by the receiver, it
seems that the intermediary was used by Mile High as
a source of money to "park" real estate for future development,
and as a ready source of cash. Apparently, the intermediary
had clients purchase Mile High property and park it
until Mile High could package it for future sale. The
intermediary also "loaned" money from its exchange account
to Mile High. The intermediary, which is also in bankruptcy,
is listed as the second largest creditor for Mile High.
And since Mile High is bankrupt, it appears unlikely
at this point that any money will be recovered. That
means all of those people who were doing exchanges with
the intermediary have lost their exchange proceeds.
The intermediary is listed by the receiver as a "related"
company of Mile High. It was owned and operated by a
person who has previously been charged with numerous
counts of fraud, and was convicted of two counts of
fraud and motor vehicle theft in 1999. While the Mile
High intermediary company has since been shut down by
the court (which is why I haven't bothered to name it),
the person that ran the company has now has set up another
intermediary company called, "Investment Solutions Group,"
or "ISG," which is active as I write this. ISG has recently
appeared as a sponsored link on Google and seems to
be actively soliciting exchange funds from the unsuspecting
public.
So the real question is: How does an unsuspecting
investor looking for a qualified intermediary determine
which intermediaries are safe, and which are high risk?
Looking at ISG's web site (ISG1031.com), how would you
know that this company is run by someone who has been
convicted of fraud, and has recently run another intermediary
business into bankruptcy? The simple answer is, unfortunately,
there is no easy way. The only thing you can do, as
I've said repeatedly in other articles, is to make sure
the intermediary puts your money in a separate account
for only you. Had the exchange money been held by the
intermediary in separate accounts, the money would have
been beyond the reach of Mile High Capital.
Nobody
is going to protect you in a 1031 exchange -- you have
to protect yourself. And the only way to do that is
to make sure the intermediary puts your exchange money
in its own account. Then, you must constantly make sure
it stays there for the duration of your exchange.
|
