Atlantic Exchange was acquired as part of two-year acquisition string by Edward Okun of several companies between 2005 and 2007. By March of 2009, Okun was found guilty by a federal jury and was left to face up to 400 years in prison. In the meantime, Atlantic Exchange clients were out the money they had entrusted to the company. Between all the companies, Okun was found guilty of defrauding as many as 577 people of $132 million, highlighting again the importance of understanding how funds are held, invested and accounted for within 1031 companies.
Prosecutors had accused Okun of using client funds to purchase a helicopter, yacht, a $4 million Miami home and a $200,000 wedding.
Atlantic Exchange, which had been based in Boston, held fund of clients who were working with the company on what’s called 1031 exchange. The name of the exchange refers to the Internal Revenue Service code, written in the 1920s, which allows sellers of property to defer capital gains by exchanging the property for a like-kind property.
The rules governing these exchanges can be complicated and hard to follow. For example, “like-kind” might be subject to interpretation to the person looking to do the exchange, but it more defined by the IRS. In the case of business properties, like-kind is meant to be understood as property that is the same. So, for example, a commercial property must be exchanged for commercial property. However, when it comes to businesses engaged in these transactions, the properties do not need to be comparable in class or grade. On the contrary, the rules are tighter for individuals who wish to take advantage of the code. If an individual wishes to exchange one property for another, those properties must be of the same grade or class.
There are also different ways to conduct the exchange. A property can be relinquished before a new one is purchased for exchange, or after it. In addition to holding the funds for the exchange, QIs work through these complexities on behalf of their clients.
In order to qualify for the tax benefit, sellers must place the proceeds from the sale into the hands of a Qualified Intermediary such as Atlantic. Those funds remain with the QI until they are used to purchase the exchange property, which occurs within 180 days. So, these are short-term deposits of funds, and often times, clients perceive them as being perfectly safe and deposited into insured accounts.
As the Atlantic Exchange story demonstrates, this is not always the case, as it was not the case with other QIs that had to file for bankruptcy in the wake of investment losses in the past year.
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