Sonoran City News

Southwest 1031 Exchange Exposed - Part 3

Attornery's for Donald K McGhan have filed motions to dismiss the lawsuits filed against him in the Southwest 1031 Exchange, Arrow 1031 Exchange, and Qualified Exchange Services caes. The two filings are available for download here and here. Once again, this makes for fascinating reading.

Basically McGhan's attorneys contend that the lawsuit needs to be dismissed because Don McGhan (this is my summary and opinion, I'm not an attorney) had the right to direct funds as he saw fit and he cannot be held personally responsible. Of course, Don McGhan was the Qualified Intermediary of record with the State of Nevada, I'm not sure how much  more personal responsibility there can be.

Southwest 1031 Exchange Exposed - Part 2

Robert Brace, the Santa Barbara attorney representing the class action lawsuit filed against Southwest Exchange and others, brings up a good point in his filing. Why didn't anyone Google Don McGhan?

Let's say I own a frozen custard stand. For years I've poured my heart and soul into frozen custard and now own the most popular custard stand in Arizona. One day I'm approached by a group of investors who offer to purchase my custard stand for a large amount of money. What is the first thing I do before I consider any offer? I hop online and Google their names, the names of their children, the neighbors, the dog, etc. There is no way I would ever consider selling something I built from the ground up without thoroughly researching those involved.

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.

Southwest 1031 Exchange Update

The receiver in the Southwest 1031 Exchange case appeared before District Court Judge Elizabeth Gonzales to discuss where the money has gone. Apparently there are 20 corporate entities which might have been the recipient of the missing money.

All of the companies are subsidiaries of Donald McGhan's company, MediCor. Ltd. The companies are located in 11 different countries. I don't have any idea what the laws are concerning sending large sums of money overseas, but I'm guessing there has to be some fairly substantial records of these transactions. Hopefully some positive news will turn up soon.

I'm still extremely interested in hearing from people involved with Southwest Exchange Services, Arrow 1031 Exchange, or Qualified Exchange Services. If you or someone you know had dealings with any of these companies, please contact me.

Southwest 1031 Exchange - Changing the rules?

The recent closure of Southwest 1031 Exchange and its affiliates, Arrow 1031 Exchange and Qualified Exchange Services (QES), raises an interesting question; if the IRS requires you to follow its rules, should the IRS be responsible the regulation of said rules?

An Arrow 1031 victim contacted me. He lives in Texas and used Arrow 1031 Exchange for his 1031 because he contacted the IRS and was told he must use a qualified intermediary to complete his 1031 exchange. He searched the Internet and made a few calls and selected Arrow 1031 Exchange as his qualified intermediary because Nevada requires Qualified Intermediaries (QI's) to be registered, they had a good website and the staff was friendly.

I'll be the first to admit a good website is huge. I've been conducting business online since the early 90's when the Internet was text based and I'm a sucker for a good website. A friendly and helpful staff is also huge. The Nevada registration would also have sealed the deal for me.

In hindsight we now know the registration meant very little, if anything. We already know a good website and friendly people means little when it comes to trust and money.

I've been a cheerleader for 1031 Exchanges for years. I believe in the concept and the benefits. I have always been extremely frustrated by the lack of educational requirements on those involved. The lack of regulation for Qualified Intermediaries (QI) has always concerned me and I've frequently warned clients about who they are trusting with their money. But it never occurred to me that the IRS has to take some responsibility in this. The IRS requires the use of a QI. I would guess that the average investor assumes the IRS must regulate the QI industry if it requires the use of a QI to complete a 1031 Exchange.

If the government decided to build a bridge across the Grand Canyon and made that the only way to get from one side to the other, it is reasonable to expect the bridge to provide safe passage? Basically the IRS has built a rope bridge with the Qualified Intermediary requirement but they failed to ensure the bridge was safe or to even provide a safety net.

Southwest 1031 Exchange - A Victim's Story

Wayne and Greta Albritton are the type of people you wish were member's of your family. They own dogs. They worked hard in the Las Vegas entertainment industry, owned bars and restaurants, performed in shows, bought a cabin for investment, and eventually decided to move to Palm Springs, CA. A great life and a relaxing retirement on the horizon.

If you call performing in the Palm Springs Follies retirement.

The Albrittons decided to sell their cabin in Nevada and purchase an investment property closer to their Palm Springs home. All was well. They closed on the sale of the Cabin in early December, identified a replacement property and were scheduled to close on the replacement purchase January 26, 2007.

Little did they know using Southwest 1031 Exchange would possibly destroy their retirement dreams.

As January 26 approached, Southwest 1031 Exchange was contacted by the title company and by the Albrittons in an attempt to determine when the $433,000 from the sale of their cabin would be wired to the title company in Palm Springs. Eventually on January 26, Wayne reached Don McGhan and was assured he was walking across the street to the bank and taking care of it immediately. This was 11:00 a.m. that Friday morning. Don McGhan faxed a copy of the wire transfer to the Albrittons. Wayne and Greta left for work.

Later that afternoon at 2:27 p.m., Don McGhan left a message on their answering machine.  He said there was a screw up with the coordination of the wire transfer and it would happen the next Monday morning and not to get other people involved.

Wayne and Greta are not stupid. They knew something was wrong. The drove to Las Vegas and went to Southwest 1031 that Monday morning to get to the bottom of the situation. No one was able to tell them what was going on or what to do so they went across the street to the bank.

Silver State Bank was the bank where Southwest 1031 conducted business. Wayne asked for the manager and showed her the 'receipt' for the wire transfer. He was told they could not help them. Frustrated, eventually Wayne and Greta left. They returned to Southwest 1031 and made no headroom there.

Today, the Albritton's don't know what happened to their money. They had to cancel the purchase contract in Palm Springs and face tax implications on the $433,000. They don't know how this is going to end or if they will ever see their retirement nest egg again.

This is what I know...I've seen the 'receipt' for the wire transfer. It is not a receipt but a print of an input screen at the bank. Did Don McGhan have access to the secure wire transfer functions at the bank? Did someone at the bank assist him in creating this false document? I can only hope one of the investigators involved in this asks these questions.

Many people were damaged in this. Their dreams now seem lost forever. They deserve help and they deserve answers. If you have any information or would like to share your story, please contact me.

Arrow 1031 Exchange - Southwest 1031 Exchange Update

New update on the Southwest Exchange Corp, Arrow 1031 Exchange and Qualified Exchange Services situation.

For those victimized by Arrow 1031 Exchange, the Idaho Department of Finance asks you to contact them at 208-332-8080, toll-free at 1-888-346-3378, or visit the website at www.finance.idaho.gov (I have yet to be successful reaching this website so you might just want to call).

It is in the best interests of all victims to contact the proper state authorities to be sure they are aware of your situation. I'm going to go out on a limb and assume the record keeping at all three of these companies might be full of holes. Do not take it for granted that the receiver or the courts are aware of your situation.

Today I was contacted by a real estate agent who thinks that maybe his client used Southwest Exchange. The frightening words of that sentence were 'thinks' and 'maybe'. This is a good time for me to remind all of you that real estate agents do not have to have any special education or experience in a 1031 exchange to facilitate one. So don't rely on your agent to take care of you. I'm not trying to bash all real estate agents (I am one if you didn't already know) but we, as an industry, are woefully undereducated and given a lot of freedom to tread in waters that maybe we shouldn't.

Don K. McGhan, Southwest 1031 Exchange, MediCor

What do breast implants and tax-deferred exchanges have to do with each other? Apparently the infamous Donald K. McGhan might have the answer to that question.

Why would a man who has spent most of his life making breast implants decide to purchase three 1031 Exchange Qualified Intermediaries?

The MediCor website is currently being updated so I had to resort to Google Cache to research some of this.

From the MediCor Company History Page:

"Donald K. McGhan. Mr. McGhan is a founder of MediCor and has served as its chairman from its inception. Previously, Mr. McGhan was a founder and director of Medical Device Alliance, Inc., where he served as its chairman from its inception in 1996. Prior to that, Mr. McGhan was a founder and director of Miravant Medical Technologies, Inc., which was originally named PDT, Inc. Mr. McGhan was also a founder, chairman and president of Inamed Corporation from 1984 to 1998, founder, chairman and chief executive officer of McGhan NuSil Corporation, which was acquired by Union Carbide Corporation in 1990, and a founder, president and chairman of Immulok, Inc., which was acquired by Ortho Diagnostics Systems, Inc., a subsidiary of Johnson & Johnson in 1983."

On January 24, 2007 MediCor announced Don McGhan had resigned from the Board of Directors.

On February 6, 2007 David Keys, former chief executive officer of Southwest Exchange, resigned from Silver State's board of director. He was announced to board Jan 29.

Here is a press release I found from May 1, 2006:

BOISE, ID — May 1, 2006 — Arrow 1031 Exchange announced today that it had recently partnered with Nevada based Southwest Exchange Corporation to provide processing services for Arrow’s exchange transactions. This partnership will permit Boise based Arrow 1031 Exchange to expand their services along with providing increased financial strength to their customers. For example, each exchange transaction will now be protected by a Fidelity Bond in the amount of $20,000,000 and an Errors and Omissions policy of $1,000,000. Arrow 1031 will continue to maintain its depository relationships with local Idaho based financial institutions.

The strategic partnership of these two independent 1031 exchange companies has created a powerhouse of expertise in the field. Betty Kincaid, who founded Southwest Exchange Corporation in 1990, is a recognized exchange expert who worked with the Nevada legislature to craft legislation protecting clients using a Nevada registered intermediary. Betty is also the past President of the Women’s Council of Realtors. Kimberly Trent, President of Arrow 1031 Exchange, has been in the Real Estate industry for 18 years and has been in Boise, Idaho specializing in 1031 tax deferred exchanges since 1994. Vice President Christy Milliren has been in Boise’s real estate industry for 13 years and specializing in 1031 tax deferred exchanges since 1999. Both Kim and Christy (and a number of Southwest Exchange employees) have been awarded the designation of CES, or Certified Exchange Specialist, offered by the Federation of Exchange Accommodators, the professional trade association for qualified intermediaries. Southwest Exchange’s President and CEO, David Keys, is a CPA, Certified Management Accountant (CMA), Certified in Financial Management (CFM) and a Certified Valuation Analyst (CVA). Southwest’s CFO, Dean Koch, is a CPA and CVA. In addition, Southwest has two full time attorneys on staff. Kim and Christy are assisted in the Boise Arrow 1031 Exchange office by Laura Anderson, Marketing and Sales Representative.

As more investors use real estate investment as a wealth building tool, Arrow 1031 looks forward to continuing to provide the Idaho community with outstanding 1031 tax deferred exchange services. Kim, Christy, and the entire staff will continue to operate as the Arrow 1031 Exchange that you have grown to trust and respect. For more information about Arrow 1031 Exchange visit the Arrow 1031 online website www.arrow1031.com or call (208) 322-1031. Or for more information about Southwest Exchange Corporation, visit SEC online at www.SouthwestExchange.com or call 800.827.9150

Here is another press release:

"Southwest 1031 Exchange™ has two new affiliates!

BOISE, ID – Arrow 1031 Exchange announced on May 1 , 2006 that they have partnered with Nevada based Southwest 1031 Exchange™ to provide processing services for Arrow’s exchange transactions. This partnership will permit Boise based Arrow 1031 Exchange to expand their services along with providing increased financial strength to their customers. For example, each exchange transaction will now be protected by a Fidelity Bond in the amount of $50,000,000 and an Errors and Omissions policy of $1,000,000. Arrow 1031 will continue to maintain its depository relationships with local Idaho financial institutions.

SANTA BARBARA, CA – QES, Qualified Exchange Sevices, announced on October 20, 2006 that they partnered with Nevada based Southwest 1031 Exchange™ to provide processing services for QES’s exchange transactions. This partnership will permit Santa Barbara based QES to expand their services along with providing increased financial strength to their customers. For example, each exchange transaction will now be protected by a Fidelity Bond in the amount of $50,000,000 and an Errors and Omissions policy of $1,000,000. QES will continue to maintain its depository relationships with local California financial institutions.

The strategic partnership of these three independent 1031 exchange companies has created a powerhouse of expertise in the field. Southwest 1031 Exchange™ executives are Albert “Dee” Conton Jr., President who is a Nevada Realtor and native Nevadan. Dean Koch, COO/CFO is a CPA and CVA. Robert Noggle, Executive Vice President of Marketing and Education is a JD and CES and L. Gean Mundt, Vice President of Sales is a CES.

Arrow 1031 Exchange executives Kimberly Trent, President has been in the real estate industry for 18 years and has been in Boise, Idaho specializing in 1031 tax deferred exchanges since 1994 and is a CES. Christy Milliren, Vice President has been in Boise’s real estate industry for 13 years and specializing in 1031 tax deferred exchanges since 1999 and is a CES.

QES, Qualified Exchange Services, executives Kyleen Dawson, President has been in the real estate industry for 14 years and is a CES and Megan Amsler, Vice President has 7 years in the real estate industry and is a CES. The Santa Barbara office specializes in facilitating 1031 tax deferred, reverse and improvement exchanges.

Robert, Gean, Christy, Kim, Kyleen and Megan have been awarded the designation of CES, Certified Exchange Specialists which the Federation of Exchange Accommodators, the professional trade association for qualified intermediaries, awards this designation once you have had three years experience and pass the CES test.

As more investors use real estate investment as a wealth building tool, Southwest 1031 Exchange™, looks forward to continuing to provide outstanding 1031 tax deferred exchange services nationwide. "

Why would the 'Grandfather of the breast implant' buy three 1031 Exchange Qualified Intermediaries? For reference, Donald McGhan was fined by the SEC in March 2000 for fraud. More to come....

Southwest 1031 Exchange Resources

More information for those involved with Southwest 1031 Exchange, Arrow 1031 Exchange or Qualified Exchange Services (QES).

Yesterday I heard from Rob Egenolf, he is a real estate and tax attorney in Santa Barbara specializing in tax deferred exchanges. Full disclosure...he owns a competing Qualified Intermediary company.

Mr. Egenolf was exceptionally kind in sharing his wisdom on the situation. He has given me permission to post his comments here.

Here is some of what he had to say...

"One thing the victims might want to know is that if their exchanges fail in 2007, they will have a taxable event in 2007 even though the funds were "stolen"  The deductible loss for the funds will probably not be deductible until they have been finally determined to be collectible and that will likely not occur until 2008 at the earliest.

Also, the bonds they had are likely not to provide any help either.  They do not cover "owner" theft, and there is some question as to what was covered and whether or not the premiums were even paid.

People choosing a QI need to ask more questions about security of funds before choosing their QI.  For instance, our company Amherst Exchange has always offered a full bank guarantee where the bank used (and we use several;) guarantee that the funds will be there when the replacement property is being acquired.  A signature of the exchanger is necessary to move the funds so there is no risk at all of the type of loss we have seen

Also, one should make sure all fund are held in segregated accounts so it is easy to audit things and the exchanger will have prompt knowledge of any difficulty. Keeping funds in one co-mingled account only benefits QIs that keep all or part of the interest earned.  In today's world, clients should insist that they get ALL interest earned on funds held."

Mr. Egenolf also gave me the contact information for an attorney who is filing a class action suit against QES. My hope is to contact him tomorrow to get further information to share with all of you.

Yesterday I started the list of those involved. Again, if you have been victimized you need to visit the website set up by the court appointed receiver.

Here are some other resources. Please contact me if you know of others or are involved in any way.

Nevada Real Estate Division - there are claim forms to be completed here

Copy of the Southwest Exchange Motion - from the klas-tv website

Marquis & Aurbach - firm representing many of the investor's

Nevada Secretary of State Securities Division 1- 800-758-6440

Southwest 1031 Exchange

While working on my quest to help Wayne and Greta Albritton, I've compiled some interesting information and a list of resources for those involved in the Southwest 1031 Exchange, Arrow 1031 Exchange, and Qualified Exchange Services debacle.

Yesterday I brought up the closure of Arrow 1031 Exchange. It has been pointed out to me that I have failed to mention Qualified Exchange Services (QES). QES, now closed, was a Santa Barbara based 1031 company that was purchased in 2006 by Don McGhan and company, the owner of Southwest 1031 Exchange. So far I am aware of at least $12 million in missing funds from QES.

For those playing along at home, I'm going to try to put together a summary of those involved just so we can keep everything straight.

The Main Company:
Southwest 1031 Exchange -
  - Donald McGhan, Chairman
- David Keys, Former CEO Southwest Exchange, Resigned from Silver State Bancorp Board February 6
Affiliates:
Arrow 1031 Exchange of Boise, Idaho (owned by Southwest Exchange)
Qualified Exchange Services (QES) of Santa Barbara, California (owned by Southwest Exchange)

Capital Reef Management - Company which purchased QES - Owned by Don McGhan, Jim McGhan and others.

Silver State Bank - where Southwest 1031 did their banking

Brown & Brown Insurance of Santa Barbara, CA - according to the Southwest Exchange website, this is the company which held the 'bond'. I've been told the bond expired. Still researching....

Larry Bertsch  - receiver for Southwest Exchange, more info here. Visit this site is you are an 'injured' party. This is where you contact the receiver.

District Judge Elizabeth Gonzalez - the judge who will be presiding over the lawsuits.

$83 Million and 75 people and counting - the amount of money and the number of people believed to be victims

Next post...things you can do if you are a victim