Monday, February 15, 2010
An article by Andrew Moore in the local paper - The Bend Bulletin - details what sure looks like a Ponzi Scheme to forensic accountants who are now poring over the records of the defunct Summit 1031 Exchange trying to figure out how a company that was supposed to be investing 1031 exchange money in safe, liquid investments could have lost $14 million.
There's lots of background material at the Bulletin, including introductions of all the principles, accusations, red flags, and general confusion that appeared in the bankruptcy trustee's report, where the story is picked up below.
Kevin Padrick, the court-appointed bankruptcy trustee who authored the report, also accuses Summit in the report of operating a Ponzi scheme. The sentiment was echoed by Judge Randall Dunn, the Bankruptcy Court judge overseeing Summit's case, who said the company “arguably ran a Ponzi scheme” in remarks at a hearing in Portland last May.Interestingly, one of the two comments left for this story at the Bulletin points out a few details about Kevin Padrick, the bankruptcy trustee, who is seen as a "well respected bankruptcy lawyer who gave up his law practice and turned to the dark side to make his fortune as a looter in the bankruptcy and distressed business industry."
More than a year after Summit's bankruptcy filing, the case continues to wind its way through Bankruptcy Court. It's also spawned a number of lawsuits, including a $30 million suit against Umpqua Bank brought by Padrick in which he accuses the bank of aiding and abetting Summit in the scheme.
Umpqua was Summit's primary bank, and Padrick alleges in the suit that Umpqua learned of Summit's activities in 2007 when Summit and the bank discussed a strategic partnership.
Padrick is now working to liquidate Summit's assets for the benefit of roughly 150 creditors, mainly Summit's exchange clients.
Anyway, the details in this story shoot a few more holes in whatever is left of the once heralded "efficient market theory", an idea that doesn't look as though it's survived the last ten years of bursting asset bubbles in the U.S.
Padrick's 78-page trustee's report explains in detail the results of his “forensic accounting investigation” into the company, which he describes in the report as “extensive and complex.”Not surprisingly, one of the principles ended up with loans to finance a multi-million dollar home complete with a swimming pool and tennis court in a swanky subdivision.
He writes of combing through 600 boxes of Summit documents, 100,000 e-mails spread between seven computer servers and more than 500,000 entries in Summit's accounting database in an attempt to make sense of the company's business dealings.
Those dealings also include roughly 240 property investments spread between more than 100 separate entities, including many limited liability companies controlled by the shareholders that received loans from Inland.
Summit's primary business was facilitating 1031 exchanges, complex real estate transactions that help real estate investors defer capital gains taxes.
But as early as 1995, and certainly by 1997, according to the report, Neuman and Stevens started transferring money from Summit to Inland and began weaving the tangled web that Padrick is working to unravel today.
“It is the Trustee's conclusion,” Padrick writes in his report, “that this conduct was fraudulent because at the time the Exchange Agreements were being executed between the new clients and Summit, the shareholders knew that they were using new exchange clients' funds to fund existing clients' purchase of replacement property, make refunds or make ‘loans' to Inland, and those funds were not being held in a financial institution for the purpose of completing the new client's purchase of replacement property.
According to Padrick's report, Inland's sole activity was to receive client funds from Summit and then “loan” the money predominantly to the shareholders, their friends and family, and entities owned by them, for their use. Inland loaned money to more than 100 entities and individuals, the report says.
It's also worth noting that, since we've been here, we've heard quite a few stories about how the Bend Bulletin was an active promoter of the local real estate market back when the bubble was at its maximum point of inflation and that the homebuilders and their cronies basically ran the local government.