A Sad New Tale of 1031 Intermediary Theft

This article is a sad story about a local company that set up its own 1031 intermediary. The company and its related intermediary are both bankrupt and are both accused of bilking investors of millions of dollars.

One of the requirements of a 1031 exchange is that you must use a "qualified intermediary" to handle your exchange, and hold your exchange funds. With all the proceeds of every exchange going to intermediaries, you would think there would be rigorous licensing and regulations for this industry. But there is not -- not by the Federal government, nor by any of the 50 States. Not surprisingly, there have been problems with some intermediaries and their client's money. I have written a number of articles alerting readers to the potential problems caused by this situation, and how to avoid them.

In a still developing case that is being covered extensively by The Denver Business Journal, Denver-based Mile High Capital held seminars throughout the United States for the purpose of enticing individuals to invest in Mile High's real estate projects. Apparently, Mile High actually owned very little of the property they were selling. While approximately 1,000 investors nationwide placed money with the company, it seems that few of those will actually receive any property. The bulk of the investment money was used to fund additional seminars, and it appears at this point that most investors will probably lose all, or a substantial amount, of their investment. The Colorado Securities Commissioner is actively investigating the company, and has put it under the control of a receiver, who has placed it into Chapter 11 bankruptcy.

...Nobody is going to protect you in a 1031 exchange - you have to protect yourself...

As a part of their seminars, the company and its speakers also touted the benefits of 1031 exchanges, apparently to entice investors to use their 1031 exchanges to invest in the company's properties. Where the 1031 part of the fraud began is when the company set up its own company to act as a qualified intermediary. This 1031 company shares offices with Mile High. While it's not clear if their original intent was only to act as an intermediary for Mile High transactions, the intermediary soon began soliciting exchanges from the public at large. A Google search for anything related to "1031 exchanges" during that time showed the intermediary as a "sponsored link." Sponsored links are ads by companies that pay Google to appear at the top of the list when the public does searches for certain terms. In other words, the intermediary was soliciting exchanges from the public at large.

From a recent report to the court by the receiver, it seems that the intermediary was used by Mile High as a source of money to "park" real estate for future development, and as a ready source of cash. Apparently, the intermediary had clients purchase Mile High property and park it until Mile High could package it for future sale. The intermediary also "loaned" money from its exchange account to Mile High. The intermediary, which is also in bankruptcy, is listed as the second largest creditor for Mile High. And since Mile High is bankrupt, it appears unlikely at this point that any money will be recovered. That means all of those people who were doing exchanges with the intermediary have lost their exchange proceeds.

The intermediary is listed by the receiver as a "related" company of Mile High. It was owned and operated by a person who has previously been charged with numerous counts of fraud, and was convicted of two counts of fraud and motor vehicle theft in 1999. While the Mile High intermediary company has since been shut down by the court (which is why I haven't bothered to name it), the person that ran the company has now has set up another intermediary company called, "Investment Solutions Group," or "ISG," which is active as I write this. ISG has recently appeared as a sponsored link on Google and seems to be actively soliciting exchange funds from the unsuspecting public.

So the real question is: How does an unsuspecting investor looking for a qualified intermediary determine which intermediaries are safe, and which are high risk? Looking at ISG's web site (ISG1031.com), how would you know that this company is run by someone who has been convicted of fraud, and has recently run another intermediary business into bankruptcy? The simple answer is, unfortunately, there is no easy way. The only thing you can do, as I've said repeatedly in other articles, is to make sure the intermediary puts your money in a separate account for only you. Had the exchange money been held by the intermediary in separate accounts, the money would have been beyond the reach of Mile High Capital.

Nobody is going to protect you in a 1031 exchange -- you have to protect yourself. And the only way to do that is to make sure the intermediary puts your exchange money in its own account. Then, you must constantly make sure it stays there for the duration of your exchange.