Feds Sought 400 Years, Get 100 In Sentencing Of Owner Of 1031 Exchange Intermediary Accused Of Using Clients' Escrow Cash As "Personal Piggy Bank"

In Richmond, Virginia, Bloomberg News reports:

• Edward Okun, the Miami businessman convicted of stealing from customers of his tax-deferral firm, 1031 Tax Group LLC, was sentenced to 100 years in prison for running a $126 million fraud scheme. U.S. District Judge Robert Payne handed down the sentence [Tuseday] in Richmond, Virginia, where Okun’s company was based. Prosecutors sought a sentence of 400 years, or a similar term amounting to life in prison. Jurors in March found Okun, 58, guilty of conspiracy, wire fraud, money laundering, smuggling and perjury following a three-week trial.

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• Assistant U.S. Attorney Michael Dry argued Okun’s fraud was worse than others, because his victims thought they were using a risk-free service, as opposed to investing. The tax-deferral industry temporarily holds real-estate sale proceeds for a fee under section 1031 of the U.S. tax code, allowing customers to defer taxes when similar properties are bought within 180 days. Instead of holding the money in banks, Okun used it as a “personal piggy bank” for expenses that included financing a divorce and buying jewelry for his new wife, prosecutors said. [...] Okun expanded the company in 2006 and 2007 by buying competitors and gaining access to their customers’ real-estate sale deposits.

For more, see Con Man Edward Okun Gets 100 Years for Fraud Scheme.

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More On Now-Defunct 1031 Exchange Intermediary, $160M In Trust Money Missing

In Indiana, the Indianapolis Business Journal reports on embattled businessman Edward Okun and his Richmond, Va.-based Investment Properties of America:

• A high-flying Carmel businessman who moved his base of operations to Miami a couple of years ago is accused of burning through $160 million of investors’ money in the collapse of his real estate empire. [...] Investigators believe [Edward] Okun [...] used investor money to fund a lavish lifestyle that included four mansions, a helicopter, three airplanes, 20 automobiles and a 130-foot yacht. Investment Properties filed for Chapter 11 bankruptcy in November.

• His investment firm, The 1031 Tax Group, and more than a dozen affiliated companies around the country, sought bankruptcy in May. The 1031 Tax Group was named after a section of federal tax code that allows certain commercial property owners to defer capital gains taxes by reinvesting proceeds from property sales into other real estate. Money held by 1031 Tax Group was sheltered from taxes until investors put their gains into other properties later. But last year, investors began complaining that money they entrusted to Okun had vanished. In fact, Okun and his Investment Properties had “borrowed” funds investors had placed in 1031 Tax Group, according to a report by James Lukenda, a managing director of Huron Consulting Group. A New York bankruptcy court appointed Lukenda as 1031’s chief restructuring officer last year.

For more, see Empire crumbles (Real estate exec with lavish lifestyle accused of $160M fraud).

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Virginia Feds Indict "1031 Exchange" Operator; $132M In Escrow Funds Misappropriated, Says Indictment

The South Florida Business Journal reports:

• Miami businessman Edward H. Okun was arrested Tuesday at his Hibiscus Island home on federal charges connected to a scheme to defraud investors of millions of dollars. Monday, a federal grand jury in Richmond, Va., indicted Okun, 57, on charges of mail fraud, bulk cash smuggling and making false statements. [...] According to the indictment, Okun used his 1031 Tax Group LLP to defraud clients of millions of dollars through false pretenses between August 2005 and April 2007.

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• The company, now in bankruptcy in New York, was in the business of acting as an intermediary for 1031 exchanges. The 1031 section of the tax code allows investment property owners to defer the capital gains tax due on properties sold, dependent on the use of the proceeds to purchase new property in a specified time frame. To do this, investment property owners deposit the proceeds of sales with qualified intermediaries, such as 1031 Tax Group, and sign exchange agreements that include various promises to clients regarding the safekeeping and use of exchange funds.

• The indictment alleges Okun misappropriated $132 million in client funds to support his own lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate and purchase additional qualified intermediary companies to obtain access to additional client funds.

For more, see Miami businessman faces federal fraud charges.

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Go here for some 1031 exchange real estate investor horror stories that have occurred when the wrong intermediary is used to conduct the exchange. sneaky slick escrow agents beta

1031 Exchange Intermediary Under Fire; Facing Accusations Of Pocketing $160M Of Clients' Cash

The Miami Herald recently ran a story on Edward Okun, the owner of 1031 Exchange Group, a company in the business of holding, in trust, the money of investors wanting to defer their tax bills on sales of investment real estate. The story describes the hot water he finds himself in for allegedly misappropriating millions in those funds that were held in trust. An excerpt from the story:

• The flashy 59-year-old businessman amassed a reported personal fortune of $659 million -- with all the trappings: a 130-foot yacht, a fleet of luxury cars, a helicopter and several private jets. But the empire Okun built is now unraveling amid a federal investigation, lawsuits and claims by hundreds of investors who say they were fleeced of $160 million in one of the largest business collapses of its kind.

For more, see Miami Beach investor accused of misspending $160 million (A Miami Beach businessman is accused of squandering $160 million from investors. He signed an agreement that let him keep his two multimillion-dollar homes).

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Two Sentenced For Roles In Theft Of $126M In Client Funds Held In Connection With Real Estate Tax Free Exchange Transactions

From the U.S. Department of Justice:

• Two former employees of Edward H. Okun, who was sentenced to 100 years in prison on Aug. 4, 2009, after a three-week jury trial, were sentenced [...] for their roles in a scheme to defraud and obtain approximately $126 million in client funds held by The 1031 Tax Group LLP (1031TG).

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• According to the plea agreement and statement of facts, [Lara] Coleman and others(1) used 1031TG and its subsidiaries in a scheme to obtain millions of dollars of client funds by false pretenses. [...] In the plea agreement and statement of facts, Coleman admitted that 1031TG falsely represented that it would hold client funds solely to complete the clients' [Section] 1031 exchanges.(2) Coleman admitted that after obtaining clients’ exchange proceeds with that false promise, she and others misappropriated approximately $132 million in client funds to support the lavish lifestyle of the owner of 1031TG, pay operating expenses for the owner’s various companies, invest in commercial real estate and purchase additional qualified intermediary companies to obtain access to additional client funds. In addition, Coleman admitted that she lied to federal investigators about statements she made in 2006 to internal attorneys for Investment Properties of America about the amount of money she and others had misappropriated.

For the Justice Department press release, see Two Virginia Residents Sentenced for Their Role in Scheme to Defraud Clients of Funds Allegedly Held in Trust.

(1) Coleman was sentenced to 10 years in prison and ordered to pay full restitution. In addition, Robert D. Field II was sentenced to five years in prison and was ordered to pay full restitution for his participation in the conspiracy.

(2) Section 1031 of the Internal Revenue Code allows investment property owners to defer the capital gains tax that would otherwise be due on properties sold, if the proceeds are used to purchase new property in a specified time frame. To facilitate such exchanges, investment property owners deposit the proceeds from the sale of their property with qualified intermediaries and sign exchange agreements, which include various promises by the qualified intermediaries to clients regarding the safekeeping of exchange funds in trust. EscrowRipOffKappa