Alleged fraud common in unregulated industry
BRECKENRIDGE – Money shuffling schemes, such as the one “Scoop” Daniel is accused of, aren’t uncommon in the world of 1031 exchanges, a practice that is unregulated and can be offered by anyone, including – as in one recent Denver case – a convicted felon.Unfortunately it’s rare for victims of such scams to ever see their money again, according to experts in the field.”If the intermediary spent the money there’s no place to go to get it,” said George Beardsley, president and owner of Land Title Guarantee Company of Summit County, whose company arranges about five or six 1031 exchanges a month.Breckenridge attorney Daniel, who acted as a qualified intermediary, is accused of taking in excess of $500,000 of his clients’ 1031 exchange money before disappearing on April 27, authorities said on Wednesday.One client, Gene Gregory, who hired Daniel for his 1031 exchange last year told police that when he approached Daniel for the $254,000 that should have been in an escrow account, Daniel told him it was gone, according to an affidavit for Daniel’s arrest.Daniel eventually admitted to Gregory that he used his money to repay other clients’ 1031 funds, and had been using his clients’ accounts to pay off his personal debt, the affidavit said.Because qualified intermediaries aren’t regulated, these situations are happening more and more often.”It’s not a ‘Scoop’ phenomenon,” Beardsley said.Gary Gorman is the founding partner of Denver-based The 1031 Exchange Experts and has written several books and numerous magazine and journal articles on 1031 exchanges, as well as instructed nationwide seminars on the topic.Several of Gorman’s articles focus on fraud within the 1031 exchange system, a problem the industry lends itself to because of the lack of rules and regulations.”There are no entry barriers into this industry. So there are people doing exchanges as qualified intermediaries that have no idea what they’re doing, and (they) do things that are just flat wrong, and the poor taxpayer isn’t protected from the incompetence,” Gorman said.In one case, a convicted felon in Denver began practicing as a qualified intermediary and supposedly stole millions of dollars from his customers before the Attorney General shut him down, Gorman said. That case is being investigated, but he has opened another exchange company, which authorities have allowed him to keep open with a court-ordered stipulation to update clients on their exchanges every two weeks.In February, a well-respected 1031 exchange management company called Southwest Exchange Inc. in Nevada suddenly closed its operation with $100 million in clients’ funds unaccounted for. A class action lawsuit has been filed against the company’s owners and the FBI is investigating.Nevada is the only state that requires 1031 companies to post a bond to protect consumers, but the bond is only $50,000.The best, and perhaps only, way for taxpayers to protect themselves during a 1031 exchange is to make sure their qualified intermediary deposits their money in a separate bank account, as opposed to commingling funds from all their clients.Gorman said 95 percent of qualified intermediaries commingle funds, mainly in order to collect interest from their clients’ money, which creates huge problems.”It’s easy to steal. It really provides no protection for the taxpayer. If there’s a problem, it’s virtually impossible to figure out who has what slice of that pot,” he said.For instance, a qualified intermediary in Minnesota used his client’s money to day trade, lost most of it and filed for bankruptcy. Since the intermediary’s remaining money was pooled together, the court ruled that the funds were an asset of the intermediary and could be used to pay that person’s debt as opposed to being returned to the 1031 clients.With separate accounts corresponding to a client’s name and tax identification number, the client still can’t use the money, but can keep tabs on it through bank statements.”That’s the only way to safeguard it,” Gorman said.Both Gorman’s company and Land Title Guarantee Company of Summit County separate their clients’ 1031 funds.
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