1031 Exchange Intermediary Files Bankruptcy; $Millions Unaccounted For

The San Jose Mercury News is reporting that the 1031 exchange intermediary:

• "1031 Tax Group of Richmond, Va., which operated in San Jose as 1031 Advance, filed for bankruptcy in New York City over the weekend. But even before then, it had become the subject of investigations by the U.S. Postal Service and U.S. Attorney's Office in Virginia."

Millions of dollars of investors money that was being held by the 1031 exchange intermediary for reinvestment by the investors is reportedly missing. One couple trusted the company with $10.6 million, and another investor had over $3.3 million of her investment money held by the company.

A 1031 exchange (a reference to Section 1031 of the Internal Revenue Code) is a method by which real estate investors may defer capital gains taxes if they sell and buy property within a 180 day time period. To delay paying taxes, investors must place the money with an independent third party - a trust company, title company, or an entity referred to as a qualified intermediary, until the deal is done. In these transactions, such independent third parties hold onto the money until the investor identifies the new property and closes escrow.

For more, see Real estate firm's collapse worries investors.

For a prior post on another 1031 exchange intermediary alleged to have misappropriated real estate investors' money, see 1031 Exchange Accomodators, Others Accused in $80 Million Theft.
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Colorado Attorney / 1031 Exchange Intermediary Accused Of Ripping Off Clients

In Summit County, Colorado, the Summit Daily News reports:

• "The amount of money Breckenridge lawyer Royal "Scoop" Daniel allegedly defrauded his clients of before disappearing in late April is growing, but police won't have an exact number until a detailed accounting report is complete. In early May, police estimated about $561,000 of clients' money was missing; recent estimates put that number at closer to $800,000, said Breckenridge Sgt. Susan Quesada. Six potential victims have come forward, Quesada said."

The article is not clear as to how many of the victims used attorney Daniel as a 1031 real estate exchange intermediary; however, the report states that he did act as a qualified intermediary for 1031 real estate exchanges and at least one couple reportedly lost $80,303.10 from the proceeds of the sale of an investment condo in Keystone, which Daniel handled as a 1031 qualified intermediary and held the couple's money pending a reinvestment of the funds into another real estate investment. (An opinion article in the Rocky Mountaiin News reports that law enforcement agencies believe that Daniel may have absconded with more than $1 million from the proceeds of 1031 exchanges he had put together for clients; see No cure for rogues).

A 1031 exchange, which is a reference to section 1031 of the Internal Revenue Code, is a process used to legally defer paying capital gains taxes when selling an investment property. For the story, see Scoop investigation waiting on accounting report.

Go here for other posts on the recent reported problems in the 1031 exchange industry.

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).

Go here for more on Edward Okun.

Go here for The 1031 Tax Group's Chapter 11 Bankruptcy Trustee newsletter. sneaky slick escrow agents beta

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.

***

• 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)

***

• 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.

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.

***

• 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.

Go here for other posts on Edward Okun.

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 Facilitator Convicted In Escrow Funds Swindle; 4 Victims Left Without $21M In Proceeds From Real Estate Sales Earmarked For Reinvestment

From the Office of the U.S. Attorney (Los Angeles, California):

• Ezri Namvar, a prominent Los Angeles businessman and real estate developer, was found guilty [] of four wire fraud charges for stealing approximately $21 million from four clients who allowed his “qualified intermediary” company to hold their money in safekeeping before it was reinvested in real estate. [...] The jury convicted a second defendant on the four wire fraud charges. Hamid Tabatabai, 63 of Agoura Hills, was Namvar’s right-hand man at the qualified intermediary company.

***

• The evidence presented at trial showed that four victims entered into agreements to have approximately $25 million deposited with Namvar’s company, Namco Financial Exchange Corp. (NFE), which held itself out as a qualified intermediary for real estate transactions commonly called “like-kind exchanges,” “tax-free exchanges” or “1031 exchanges.” Under exchange agreements with NFE, the money belonging to the victims was to be held in safekeeping so the money would be available upon demand to effectuate 1031 exchanges.
• However, instead of holding the money as promised, Namvar, with the assistance of Tabatabai, used the victims’ money for a variety of unauthorized and undisclosed purposes, including paying off creditors and investors of Namvar’s investment company, Namco Capital Group, Inc. (NCG).

***

• During the course of the fraudulent scheme, the four victims provided NFE with approximately $25 million in 1031 exchange proceeds, of which only approximately $4 million was returned to or used on behalf of the victims.(1)

For the U.S. Attorney press release, see Prominent L.A. Businessman Convicted On Federal Fraud Charges For Stealing $21 Million Entrusted To His Firm.

Go here for other posts on Section 1031 exchange escrow ripoffs.

(1) In addition to losing their money, the victims also face a stiff Federal income tax bill (a bill they were looking to defer by reinvesting their loot within a certain time frame, in accordance with Section 1031 of the Internal Revenue Code) on the profits from the real estate investment sales that generated the proceeds, with the prospect of having insufficient cash to pay it.

More On 1031 Exchanges

Realty Times recently ran two stories explaining the mechanics of, and the benefits in using, so-called 1031 exchanges, in which real estate investors are able to defer payment of income taxes due (and possibly avoid the income taxes altogether if this tax deferral technique is continued by an investor indefinitely) on their profitable real estate investments. For those who are interested, see:

• Getting A Handle on 1031 Exchange Rules,
• 1031 Exchanging from Brick & Mortar to Oil & Gas.

Success in using this tax deferral technique will depend on the level of expertise and integrity of the company used as a 1031 exchange intermediary. For some real estate investor horror stories that have occurred when the wrong intermediary is used to conduct the exchange, see 1031 Exchange Intermediaries - Problems.

Alleged 1031 Exchange Scam Leaves Real Estate Investors With Big Tax Bill & No Money To Pay It With

The New York Post reports:

• Federal authorities are investigating a Virginia-based finance company that went belly-up last year, sticking hundreds of real-estate investors with millions of dollars in losses, The Post has learned. The 440 investors had parked the proceeds from their real-estate sales with LandAmerica 1031 Exchange Services Inc. in hopes of delaying capital gains taxes - only to find their entire investment nest egg missing.

***

• And worse, the Internal Revenue Service wants those burned in the failure of LandAmerica and other so-called "qualified intermediaries" to pay taxes on the profits they no longer have. [...] The LandAmerica failure and FBI probe highlight a growing issue for 1031 accounts. When Congress created these so-called "Starker exchanges," they forgot to regulate the companies that run the 1031 accounts.

For more, see Helter Shelter (Feds Probing Tax Haven 'Ponzi Scheme').

Go here for other posts on problems with 1031 exchange intermediaries. EscrowRipOffAlpha

Links To Recent Stories On 1031 Exchange Intermediaries Stealing Escrow Funds

The following links are to articles about some of the more recently reported stories of 1031 exchange qualified intermediaries making off with their clients' escrow money that was to be used for investment:

• No cure for rogues (Abuse of "1031" shelter won't be cured by more rules)
• Looting the Escrow Account: A 1031 Cautionary Tale Continued (Buyers in Hundreds of Pending Deals Left in Lurch as 1031 Intermediaries Go Belly Up or Disappear Altogether)
• I-Team: Judge Rules Former Owner of Collapsed Financial Firm Must Testify
• Big Swindle in the high desert (The Southwest Exchange litigation ensnares an array of businesses in its web)

Go here for stories on other alleged escrow agent mishandling of funds. sneaky slick escrow agents alpha

1031 Exchange Accomodators, Others Accused in $80 Million Theft

A class action lawsuit has been filed in California against Donald Kay McGhan, 1031 exchange accommodators Southwest Exchange, of Nevada and Qualified Exchange Services, of Santa Barbara, and others containing allegations of theft of over $80 million from 130 people in 12 states, according to a report by the San Luis Obispo Tribune.

This civil lawsuit, filed by the Santa Barbara law firm of Hollister & Brace, claims the money was stolen in a scheme involving "1031" or "tax-free" exchanges of real estate. "1031" is a reference to a provision in the Federal tax law (Section 1031 of the Internal Revenue Code) that essentially says that, if you structure your transaction correctly, you can sell your investment real estate, take the proceeds and reinvest it in, what the tax law refers to as, property of a "like kind" without having to pay immediate capital gains taxes; the tax liability is deferred indefinitely. Part of structuring your transaction correctly involves the use of an independent third party intermediary to hold the sale proceeds from the sale of one property in trust until the reinvestment property is purchased.

The money that was allegedly stolen represents the proceeds of the alleged victims' sales of their investment real estate that was being held in trust by the intermediary and earmarked for reinvestment. Because the funds now aren't available for reinvestment, these investors have not only had their money stolen, but they are now ineligible for the indefinite deferral of their capital gains taxes allowed by the tax law. In other words, they will have to pay immediate capital gains taxes on the profits from their real estate sales and, hopefully for them, they have enough money from other sources to pay it.

Further, the lawsuit indicates that these investors had purchase contracts to buy property that the reinvestment proceeds were earmarked for. Because the money is now no longer available, the investors are liable for contractual damages to the sellers of the reinvestment property for defaulting on the purchase contracts.

Reportedly, the FBI is investigating the possibility of criminality. To read more, see Santa Barbara suit alleges ponzi scheme by breast implant pioneer. sneaky slick escrow agents gamma

1031 Exchange Intermediary Suspected Of Feloniously Pocketing $550K+ In Clients' Sale Proceeds Found Dead By Suicide

In Boulder Colorado, the Boulder Daily Camera reports:

• [K.C.] Schneider, who owns a commercial real estate firm in Boulder, said Wednesday he is [...] out $425,000 in real estate proceeds he gave National 1031 Exchange Service to hold while he closed on a new property.

***

• Schneider filed a complaint in October against the now-defunct holding company's owner, Debra Edwards, and earlier this month Boulder police issued a warrant for her arrest on suspicion of three felony counts of theft of more than $20,000.

• But the day before Edwards was to surrender to authorities, the 53-year-old certified public accountant and former board member of the Longmont Area Chamber of Commerce was found dead in her Longmont office. The Boulder County Coroner's Office said Wednesday that her Dec. 15 death was a suicide -- asphyxiation due to inhalation of helium.

• Edwards' death led Boulder police to close its criminal case against her. Schneider said that leaves him and two other National 1031 Exchange Service clients -- who also claim to have been bilked of tens of thousands of dollars -- out in the cold.

For more, see Suicide complicates money-recovery effort (Client says Debra Edwards' Boulder financial firm stole $425,000 from him).

Go here for other posts on problems with 1031 exchange intermediaries.

Go here, Go here, Go here, and Go here for other stories of trust account / escrow account theft of funds. EscrowRipOffAlpha

Hefty Tax Bills Ready To Bite R/E Investors Using So-Called "Tax-Free" 1031 Exchange Deals; Many Close To F'closure w/ Little Cash, Equity To Pay IRS

Crain's New York Business reports:

• During the real estate boom, hundreds of landowners reaped enormous gains on the sales of property and, under Rule 1031 of the U.S. Tax Code, deferred paying taxes on those profits by buying new properties of equal or greater value within 180 days.

• With the value of many of those purchases down 30% to 60% and with some targeted for foreclosure, the owners find themselves in a bind. If they are forced into a foreclosure, they would not only lose out on that transaction, but would have to pony up huge capital-gains taxes on their earlier sales. As a result, many owners who conducted 1031 exchanges during better economic times are feeling trapped in their money-losing investments.

• “Ordinarily, they would be tempted to just give the property back to the bank and take the loss,” says Lou Weller, a principal at Deloitte Tax. “But if they do that, they have to consider the taxes involved.”

***

• Foreclosures aren't the only threat looming on the horizon for 1031 owners. During the market boom, debt was cheap and plentiful, and many buyers relied heavily on borrowings to fund their deals. With property values down, often below the value of the mortgages, these owners find themselves with little or no equity to cover the taxes that are due on their earlier transactions, according to Mr. Weller.

For more, see Tax deals return to bite owners (Big gains made under IRS rule now being erased by falling prices) (may require paid subscription; if no subscription, TRY HERE, then click link for the story).

Los Angeles Feds: Section 1031 Exchange Accomodator Illegally Dipped Into Investor Escrow Accounts, Pocketing $23M

In Los Angeles, California, the Los Angeles Times reports:

• This week's indictment of Los Angeles real estate mogul Ezri Namvar on criminal fraud charges was welcome news to local investors who say the Iranian immigrant preyed on their shared ethnic ties and bilked them out of hundreds of millions of dollars.

• Namvar has agreed to surrender to federal authorities Monday to face charges that he stole $23 million from clients of his company, Namco Financial Exchange Corp., which safeguarded proceeds from commercial real estate transactions, said Thom Mrozek, a spokesman for the U.S. attorney's office in Los Angeles. A federal grand jury indicted Namvar on Tuesday.

• The indictment alleged that Namvar misappropriated the money in 2008, using it to pay investors and creditors from a real estate investment company he ran, instead of holding it in escrow as promised. The charges carry a combined maximum sentence of 100 years in prison. Also charged in the indictment was Hamid Tabatabai, who served as controller and vice president of Namco Financial.

***

• Allegations in the indictment related only to Namco Financial, which helped investors avoid taxes by holding their commercial real estate profits in escrow until they could be reinvested.(1) Namvar promised to safeguard the money but instead dipped into it throughout 2008 to help run his struggling businesses, the indictment alleged.(2)

For more, see Investors cheer indictment of L.A. real estate mogul (A federal grand jury accuses Ezri Namvar of misappropriating $23 million held in escrow by one of his companies. 'I am happy because he deserves it,' said one man who lost $700,000).

For the U.S. Attorney press release, see Prominent L.A. Businessman Indicted On Fraud Charges That Allege He Bilked Five Victims Out $23 Million (Ezri Namvar Allegedly Stole Money Given to His Company for Safekeeping).

Go here for other posts on Section 1031 exchange escrow ripoffs.

(1) This outfit acted as a Qualified Intermediary (Exchange Accommodator) in Internal Revenue Code Section 1031 Exchanges, a legal maneuver that enables real estate investors reinvest proceeds from sales of profitable real estate investments into new real estate deals while indefinitely deferring the payment of income taxes on the profits.

(2) If it wasn't bad enough that the investors lost all this loot, the U.S. tax laws state that if the escrowed cash isn't reinvested in new real estate within certain time parameters, the investors will have to immediately pay their income tax liability. Thus, they now face a big tax bill on the un-reinvested profits from the sales, and no longer have those profits from which to pay the IRS bill (See Alleged 1031 Exchange Scam Leaves Real Estate Investors With Big Tax Bill & No Money To Pay It With).

However, the victims may be entitled to offset their taxable investment profits by taking an itemized deduction on their income tax returns for some, if not all, of their losses. See IRS Revenue Ruling 2009-9 for tax information that may provide some guidance:

• (1) A loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss, not a capital loss, under §165.
  
  (2) A theft loss in a transaction entered into for profit is deductible under §165(c)(2), not §165(c)(3), as an itemized deduction that is not subject to the personal loss limits in §165(h), or the limits on itemized deductions in §§67 and 68.
  
  (3) A theft loss in a transaction entered into for profit is deductible in the year the loss is discovered, provided that the loss is not covered by a claim for reimbursement or recovery with respect to which there is a reasonable prospect of recovery. (Editor's Note: If you are one of the investors in the reported story, how the hell do you determine if "there is a reasonable prospect of recovery" when the criminal prosecution has only just started and you don't know how much, if any, of the loot the Feds will recover - and how much will ultimately end up in your pocket???)

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.

***

• 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.

Go here for more on Edward Okun. EscrowRipOffKappa 1031 exchange

Crooked Qualified Intermediaries Hurting The 1031 Exchange Industry

The Denver Post recently ran a story on what could happen to you if, in the course of doing a tax free, Section 1031 exchange of real estate (in order to defer tax liability on the appreciatioon of investment real estate), you entrust the proceeds of your sale with a qualified intermediary who turns out to be a crook. If your interested, see Legal tax deal could cost you.

Go here for other posts on 1031 exchange ripoffs.

Recent 1031 Exchange Intermediary's Bankruptcy Filing Highlights Lack of Industry Oversight & Regulation

A recent article on the Florida Association of Realtors website reports:

• "The bankruptcy of a national 1031 exchange firm has jeopardized some real estate deals. It’s also highlighted a problem in the like-kind exchange system – a lack of federal oversight on this legal way to shield capital gains from the IRS."

For more, see 1031 exchange firm declares bankruptcy.

For those investors who are thinking of getting rid of one intermediary and transferring their investment funds to another, see Can I fire my Qualified Intermediary...?

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).

Go here for other posts on Edward Okun.

Go here for other posts on problems with 1031 exchange intermediaries. sneaky slick escrow agents beta

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).

***

• 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

'Qualified' Intermediary For 1031 Exchange Deals Gets 7 Years In $20M+ Escrow Ripoff; Confederate To Serve 21 Months For Role In R/E Investor Ripoff

From the Office of the U.S. Attorney (Los Angeles, California):

• Ezri Namvar, a prominent Los Angeles businessman and real estate developer, was sentenced [] to seven years in federal prison for stealing approximately $21 million from four clients who allowed his “qualified intermediary” company to hold their money in safekeeping before it was reinvested in real estate.



• Namvar, 59, of Brentwood, was sentenced this morning by United States District Judge Percy Anderson, who also ordered Namvar to pay $20,930,648 in restitution. In May, a federal jury found Namvar guilty of four wire fraud charges.



• A second defendant also found guilty of the four wire fraud charges – Hamid Tabatabai, 63 of Agoura Hills, who was Namvar’s right-hand man at the qualified intermediary company – was also sentenced [] and received a 21-month prison sentence.



• The evidence presented at trial showed that four victims entered into agreements to have approximately $25 million deposited with Namvar’s company, Namco Financial Exchange Corp. (NFE), which held itself out as a qualified intermediary for real estate transactions commonly called “like-kind exchanges,” “tax-free exchanges” or “1031 exchanges.”



• Under exchange agreements with NFE, the money belonging to the victims was to be held in safekeeping so the money would be available upon demand to effectuate 1031 exchanges.



• However, instead of holding the money as promised, Namvar, with the assistance of Tabatabai, used the victims’ money for a variety of unauthorized and undisclosed purposes, including paying off creditors and investors of Namvar’s investment company, Namco Capital Group, Inc. (NCG).

For the U.S. Attorney press release, see Prominent L.A. Businessman Sentenced to Seven Years in Federal Prison for Stealing Nearly $21 Million Entrusted to His Company.

Backfiring 1031 Deal Leaves Investors In Hot Water; Despite Positive Cash Flow, 'Exploding' Balloon Payment & Low Appraisal Put Building In F'closure

In Las Vegas, Nevada, the Las Vegas Review Journal reports:

• If Randy Ghezzi had it to do all over again, he would have paid the capital gains tax on the sale of some inheritance property, instead of investing the money in a Las Vegas office building through a 1031 exchange.
  
  Ghezzi now has about $550,000 tied up in the medical office building at 2716 N. Tenaya Way, near Mountainview Medical Center, that's facing foreclosure. "I would have personally walked the check to the IRS office," said the investor, who works for the city of Pocatello, Idaho.
  
  Ghezzi, 50, is one of 34 investors suing Wells Fargo Bank and its special servicer, LNR Partners, to stop the foreclosure. In documents filed in Clark County District Court, they allege fraud, conspiracy to secure an inflated appraisal and unlawful foreclosure. They're seeking more than $30 million to cover their investment, attorney's fees and lost profits.
  
  In one regard, the lawsuit is no different than countless others spawned by the Las Vegas real estate bust, recession and overhyped expectations.
  
  But in this case, the 34 relatively small investors may lose everything even though they've never missed a loan payment, and are in no danger of doing so. The building generates about $440,000 in monthly rental income, more than enough to cover the their interest-only loan payment of $235,000 per month, attorneys for the investors said.
  
  Problems arose when the $50.7 million loan came due in full last August. The investors were unable to refinance because the property, appraised at $74 million when they bought it, now is valued at about $44 million.

For more, see Fledgling investors fighting foreclosure in Las Vegas.