Texas Attorney charged in 1031 QI theft

In yet another case of an individual getting desperate, a Texas attorney in McAllen has been charged with the theft of $300,000. McAllen police believe Rogelio Ibañez, 44, stole the money from a real estate investment firm that had hired him to hold the funds as part of a 1031 exchange.

In June, the investment firm filed a complaint with the state bar association that resulted in revocation of Ibañez's attorney license. However, they only filed criminal charges last month.

Unfortunately, we've seen this too many times before. One thing that appears consistent, as well, is that investors that begin questioning where their funds are held tend to hold off filing criminal charges - presumably hoping that they can "work with" the QI to get their funds returned. In too many cases, most the money is gone and holding off filing criminal charges only further damages their chances.

As we've indicated before, for most states, it's an "investor beware" situation. Nine states now have taken action to require Qualified Intermediaries to meet certain minimum standards but the laws can only go so far. So how does one protect themselves?

As we've blogged about numerous times, transparency - and this really goes for any "investment" - is paramount. Do you know where your QI is holding your funds? Is your QI willing to give you access to view the deposit of funds? Does your QI provide the option of setting up a Qualified Escrow between the bank, the QI and you?

Of equal importance is the segregation of held funds. Does your Qualified Intermediary hold the funds in a separate bank account - and by that we mean not only separate from their operating accounts but separate from other clients' funds? To many will say they segregate between their operations and their trust funds when, in reality, they pool investor funds into a combined investment account. Beware, the "subaccounting" systems some QI's does not protect you when there are problems.

We also believe having the backing of a financially sound parent company - whether this be a bank, title company or financially sound owners is also something you can check out. Is your Qualified Intermediary willing to share the financial statements of their ownership? Is your QI regulated by bank regulators or state examiners? Are these financials audited?

All good questions to ask. Unfortunately, too many investors looking to do a 1031 exchange don't ask these questions or blindly trust the person with whom they are entrusting their substantial sale proceeds. You should be asking the same questions you would anytime you "invest" with a company.

To speak to us about any of these questions, or to open up your exchange with Certified Exchange Specialists 1031 Corporation, a subsidiary of FirstBank, please contact us at 888-367-1031.

Qualified Escrow Agreements for Intermediaries

A number of states have instituted regulation for the Qualified Intermediary industry. Nevada, Idaho, California, Colorado, Washington, Maine and Oregon have all passed legislation. A number of other states are looking at adding some law(s) to protect taxpayers in the face of 1031 exchange facilitator fraud and losses.

Existing state law in California, Colorado and Washington as well as upcoming 1031 laws in Maine (went into effect Sept 12, 2009) and Oregon (effective January 1, 2010) require Qualified Intermediaries to:

a) Maintain fidelity bond (typically not less than $1 M), or;

b) Post deposits of cash or letters of credit equal to the amount of the fidelity bond required, or;

c) Hold all client funds in Qualified Escrow or Qualified Trust accounts which require the signatures of both the QI & taxpayer to authorize any disbursements.

As a result of the aforementioned industry losses - and the subsequent insurance claims - many Qualified Intermediaries have recently been unable to obtain option a) - a fidelity bond. If you are looking at doing an exchange, you should ask your exchange provider to provide a copy of the Fidelity Bond Evidence of Insurance to ensure your Intemediary is complying with the fidelity bond requirement. Make sure, if you are acting as a Qualified Intermediary, you are in compliance with these laws!

If your 1031 exchange provider does not have bonding, they must either post cash or a letter of credit with the state or use a Qualified Escrow account. Qualified Escrow accounts are held at a third party escrow agency and provide the greatest level of protection against fraud or missing funds. The escrow agent will only invest the proceeds according to the Agreement. They will also require signatures of both the Qualified Intermediary and the taxpayer client before any movement of those funds takes place.

If you are considering completing a 1031 exchange (or are a Qualified Intermediary without bonding) and in need of establishing a Qualified Escrow, FirstBank Escrow Services and their escrow officers can provide a Qualified Escrow Agreement that is specific to the 1031 exchange. Along with protecting the integrity of your exchange, FirstBank’s team of escrow specialists can work with you to establish an escrow contract that simplifies your risk mitigation requirements and meets your transaction needs. Client escrow accounts are individually segregated and held securely in FDIC-insured deposit accounts. FirstBank Escrow Services provides rapid review and turnaround of the agreement to ensure your transaction closes quickly.

If you or your Qualified Intermediary have need for a Qualified Escrow, please contact one of FirstBank's escrow officers for additional information at 800-964-3444.