Southwest 1031 Exchange Exposed

A class action lawsuit has been filed against Qualified Exchange Services, Southwest Exchange, Don McGhan, MediCor Ltd., and a host of others by Hollister & Brace, Attorneys at Law of Santa Barbara, CA. The 37-page filing makes for an extremely fascinating read.

First, I'm not an attorney, I'm a real estate agent who specializes in 1031 Exchanges. So there are a few things with the filing that I'm not totally clear on. The rest of it I will summarize to the best of my ability. If you have the time and interest, you should download the filing as it opened a whole new window into the background of this situation.

Basically, the filing alleges Donald K McGhan along with a handful of others discovered it was possible to exploit the huge lack of regulation in the 1031 Exchange industry. McGhan, the father of the breast implant, already had a history with the Securities Exchange Commission for filing false and misleading statements.

This is where I have to ask the question...am I the only person in the world who knows how to use a search engine? I've been able to dig up a whole lot of dirt on McGhan. Most of it has been on the Internet for year.

So McGhan and his buddies (I will name them in the next post) decide to buy Southwest 1031 Exchange in June of 2004. Using Capital Reef Management (a Delaware Corporation controlled by McGhan and family members), they purchase Southwest Exchange from Betty Kincaid for $3 million and she retains 25% control.

McGhan and buddies raid the coffers of approximately $50 million. This little theft goes unnoticed because the real estate market is booming and their investment adviser (John DeMarginy then of Smith Barney) is in on the deal.

This goes so well that the band of merry thieves buys Arrow 1031 Exchange in Boise and does the same thing. Then the market starts to slow and panic sets in because they can no longer cover for the missing money. What do they do? Well, they decide to purchase Qualified Exchange Services of Santa Barbara. They raid $10 million from this company and know the jig is up.

Certainly you realize this is an exceptionally brief summary of the deeds but I just wanted to get an overview before I start diving into the meat.

Tomorrow: The time line

Comments

[PT]

Yes, this is going to be one steaming hot, nationwide story. I have read almost all the complaint that was filed in Calif. That complaint calls the scam a "Ponzi scheme." I don't understand how no true escrow accounts ever existed for the clients of this firm.

The person who sold the business to McGhan is Betty Kincaid, who has these web sites (keep the barf bag handy):

http://bettykincaid.com/
http://bettykincaid.blogspot.com/

Her most recent blog posting was on January 11, 2007. I wonder how much sleep she's been getting since then. She is included in the complaint as a defendant.

[tiffany M]

If you're not "totally clear" on things then why are you writing about it in the first place??? Get a life

[1031 EXCHANGE]

......This goes so well that the band of merry thieves buys Arrow 1031 exchange in Boise and does the same thing. Then the market starts to slow and panic sets in because they can no longer cover for the missing money. What do they do? Well, they decide to purchase Qualified Exchange Services of Santa Barbara. They raid $10 million from this company and know the jig is up.