Operators Of Section 1031 Qualified Intermediary Ripped Off Real Estate Investors' Escrow Deposits In $25M Ponzi Scheme, Say N. California Feds

From the Office of the U.S. Attorney (San Jose, California):

• John D. Terzakis, of Hinsdale, Ill., and Robert E. Estupinian, of San Jose, Calif., were arraigned [...] in federal court for 12 felony counts of wire fraud, money laundering, and conspiracy to commit wire fraud and money laundering, in an indictment that accused the pair of operating their company, Vesta Strategies, as a Ponzi-scheme, United States Attorney Joseph P. Russoniello announced.

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• Vesta, based in San Jose, was a qualified intermediary for the purpose of conducting tax-deferred real estate exchanges pursuant to Internal Revenue Service Code Section 1031 (26 U.S.C. § 1031).(1)

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• The indictment alleges that Terzakis and Estupinian solicited and caused others to solicit prospective clients to deposit funds with Vesta based upon, among other false representations and promises, the promise that Vesta would hold those deposits and return them as promised. Instead, the defendants stole client funds for their own use, and also that they used new client deposits to pay redemptions owed to earlier clients.(2)

For the U.S. Attorney press release, see Owners Of Vesta Strategies Indicted For $25 Million Ponzi Scheme (Indictment alleges John Terzakis and Robert Estupinian Used Vesta to Steal Clients’ Section 1031 Exchange Deposits).

Go here for other posts on Section 1031 exchange ripoffs.

(1) According to the press release, a Section 1031 exchange generally allows taxpayers to avoid paying tax on capital gains by depositing the proceeds from an investment real estate sale, that would otherwise qualify as a taxable capital gain, with a qualified intermediary for up to 180 days. Under Section 1031, if the taxpayer purchases another investment property within those 180 days, the proceeds from the first sale may be rolled over into the new investment without being taxed as capital gains.

(2) This type of ripoff also triggers the Federal income tax liability that the real estate investors were looking to defer through this arrangement, leaving them in a bind if they lack other available sources of funds from which to pay the tax.