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WHEN A LIKE-KIND EXCHANGE IS TOO TAX FREE
March 20, 2008
A federal indictment handed down this week in Richmond, Virginia says a man in the business of facilitating like-kind exchanges went a bit too far in making sure that clients weren't taxable on their real estate sales. How, allegedly?
He stole the proceeds.
From the Justice Department press release:
Specifically, the indictment alleges that 1031TG obtained funds by promising clients that their money would be used solely to effect 1031 exchange as outlined in the exchange agreements. After making such promises, Okun misappropriated approximately $132 million in client funds, to support his 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.The indictment also alleges that Okun instructed employees to withdraw $15,000 in cash from Investment Properties of America's (IPofA) bank account, a company owned by Okun, and smuggle the cash to his personal yacht on Paradise Island in the Bahamas to avoid federal currency reporting requirements.
The indictment itself tells an interesting story. It says that Mr. Okun purchased and looted six existing intermediary companies. His in-house lawyer discovered the fraud and wrote a memo warning of of criminal exposure, and eventually resigned, according to the charges. The outside counsel also resigned at about the same time, in November 2006. Unchastened, Mr. Okun bought and looted another company, according to the charges, with the looting continuing until the enterprise collapsed in bankruptcy in May 2007.
The most frightening part of this story is the allegation that Mr. Okun bought and looted established exchange companies. A customer relying on the established reputation of one of these companies would have been blindsided by the looting.
The Section 1031 intermediary business isn't heavily regulated. If you are going to trust somebody with your real estate sale money, you need to take extra care that they are trustworthy. Cases like this may steer more Section 1031 intermediary business to bank trust departments.
Russ Fox has more.
Link: Indictment, United States of America v. Edward Hugh Okun
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