Con Artist? or Good Guy in Trouble? Either way, the money’s gone

When I had my CPA practice, I used to tell people, 'you never get ripped off by someone you don't trust.' What I mean is, usually after a high profile fraud case, the victim often says something like, "I can't believe this happened," or "He seemed like such a nice guy." You never hear the victim say, "I'm not surprised. I knew he was going to rip me off..."

Likability is a good reason to do business with someone, but it's not a good reason to trust them. In a high profile case that has made national news, the secret fiscal life of Colorado Qualified Intermediary (or "QI"), Royal "Scoop" Daniel, III, is becoming more provocative as the details of his financial dealings are revealed.

His public notoriety started on April 27 when the popular and amicable attorney disappeared. It was suspected immediately that he was the victim of foul play as the first details of his disappearance came to light: an empty cereal bowl on his desk, his office unlocked and unoccupied, broken sunglasses on the floor, his keys, car and dog left behind, and a silent, nine-second 911 call from his mobile phone. A massive search for him and for clues by friends has made national news. But it didn't take much digging for authorities to learn that the friendly mountain-town attorney had mounting financial problems.

According to Denver's Rocky Mountain News, friends, coworkers, business associates, and even an ex-girlfriend have sprung to his defense, claiming he couldn't have possibly done anything illegal or immoral. It simply isn't in him, they said. Authorities aren't as sure. Though friends and associates continue to plead with the public for any information regarding his whereabouts, police have issued a warrant for his arrest.

...if you can’t trust the people you don’t trust, and you can’t trust those you do, who can you trust...?

Last year when 1031 investor Gene Gregory of Franktown was ready to complete the second part of his exchange sooner than expected, he was told by Daniel that his money was tied up in a 90-day certificate of deposit. When he called the bank, they didn't know what he was talking about. Confronted, Daniel then told him it was at another bank. Ditto. When Scoop realized Gregory was simply going to call every bank he named, he finally came clean and lamented that the money was simply gone. He admitted that he needed Gregory's exchange funds to cover former 1031 clients' exchanges, and he would not have Gregory's funds until he received exchange funds from a future client.

As a testament to Scoop's amicability, Gregory did not tell authorities about the mismanagement until this year, when police started investigating the QI's disappearance.

Unfortunately, the Scoop Daniel saga is just one story in what is quickly becoming an ugly year for QI thefts. The amount missing in this case is actually somewhat insignificant when compared to a couple of developing QI problems.

So the question is: if you can't trust the people you don't trust, and you can't trust the people you do trust, who can you trust to watch your money? The answer is YOU! For years I have preached that you must make sure your 1031 intermediary places your money in a segregated account (and "segregated" means only your money is in that account). You should also insist on a method to check on the account yourself to see that your funds stay put.

Imagine if Mr. Gregory's money had been in a separate account where he could see it at any time. Would that have prevented the misuse? The threat of discovery is often enough to keep most people honest, or to slow dishonest people down. Mr. Gregory should have gone to the authorities immediately when he realized that his account was being messed with.

Greed takes many forms, and it is regrettable that the 1031 industry is not regulated. Because of that fact, it attracts some greedy people. Make sure your intermediary puts your money in a separate account.

And watch it like a hawk.