1031 Exchange $126 Million Fraud Scheme

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This is a pretty crazy story of one man using the escrow accounts of 1031 exchange to fund his lifestyle. Only after $126 million later does it all come crashing down. The conman never admits to fault!  Many lost their 1031 exchange money to this loser. Always do business with a reputable company!

American Greed Video

Bloomberg - Con Man Edward Okun Gets 100 Years for Fraud Scheme

Hi Johnson,

Slightly old news.  He was convicted in 2009.  The prosecutor asked for 400 years and he was sentenced for 100 years ... Thank God!  We won't be seeing him anytime soon.  He got what he deserved.

Ed Okun, for those who do not know the entire story, bought a number of 1031 Exchange Qualified Intermediaries over a relatively short period of time and then proceeded to "borrow" the 1031 Exchange funds for personal investments and living expenses with the intent to pay them back.  He got caught when the market crashed and there was no more 1031 Exchange funds available to buy clients' replacement properties and close on the 1031 Exchanges.  The story is vastly over simplified, but it gives you an idea of what happened.

You make a very good point.  Investors should make sure that they are dealing with a company that has a long track record and a good reputation.  Ed was not well known and had only recently bought his way into the 1031 Exchange industry. 

@Bill Exeter   - Thanks for commenting and I enjoyed you speaking at the SF summit with J Martin. The American Greed video was quite interesting the video noted that the Qualified Intermediaries are unregulated. Is that true? 

Ed was buying 1031 Exchanges with track records. Since 1031 Exchanges take months, the ownership of the company changed hands during these transactions and investors had no idea. Is there anything else an investor could do to ensure that they money held in escrow is safe?

Sadly, the federal government has chosen not to address this topic head on.  And the industry's internal attempts at standardization and voluntary regulation such as the FEA (Federation of Exchange Accommodators) have truly resulted only in enhanced industry advocacy.

The problem you note of the risk of lag time in an exchange and change of ownership is valid and can be effectively addressed with the simple use of dual signatory segregated exchange accounts.  Each exchange account is unique and separated and it takes two signatures to move money - the clients and the intermediaries.  This does not rise to the level of constructive receipt by IRS terms and is a model that is becoming more frequent and is actually gaining traction on a state by state basis.  

And it has the added bonus of placing liability for fund security also on the shoulders of the bank and by extension the FDIC.

This does add another level of due diligence when choosing a QI - check out the bank and the type of account your money will be held in.

@Johnson H.  

Yes, for the most part, Qualified Intermediaries are not licensed, regulated or monitored by any government agency.  There have been a handful of states that have passed some weak form of legislation so that they appear to be regulating Qualified Intermediaries, but the actions so far are merely lip service so that politicians appear to be doing something about it.  There is no meaningful regulation of any type.

I'm one of a small handful of people that founded the Federation of Exchange Accommodators back in the late 1980's, which is our industry trade group.  We have tried many, many times over the years to get the Federal government and various state governments to regulate our industry in some meaningful way.  The response is almost always the same; the regulatory body points out that our industry's loss ratios are just not large enough or substantial enough to warrant any kind of regulation (read the cost/benefit analysis just does not warrant the cost of regulation of our industry). 

One of the changes that was implemented since the days of Ed Okun was made by the Federation of Exchange Accommodators ("FEA").  The FEA, and some of the states legislative actions, require that a Qualified Intermediary that is bought/sold must notify all existing clients about the change in ownership control within very short timeframes. 

There are other state legislative actions that now limit what the 1031 Exchange funds can be invested in, such as interest bearing deposit accounts, so that future "Ed Okuns" will not think they can invest in real estate or other non-liquid investments. 

Investors should always evaluate the Qualified Intermediary, including their longevity under the current ownership/management team, their fidelity bond, their errors and omissions insurance, their experience (knowledge) and expertise (time in the industry), where the funds are invested and what type of account is used. 

Investors can certainly request a dual signature account (note: not all QIs offer them), but it needs to be more than just a dual signature segregated exchange account.  It needs to be a dual signature Qualified Trust Account or Qualified Escrow Account.  The LandAmerica 1031 Exchange failure ended up in bankruptcy where the court ruled that the client funds were actually corporate funds owned by the QI and therefore were part of the bankruptcy estate and subject to creditor claims.  The court noted that its decision would have been different had LandAmerica 1031 used a Qualified Escrow or Qualified Trust Account.  So, a segregated exchange account is not sufficient.  It should be a segregated Qualified Trust or Qualified Escrow Account. 

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