Investment losses suffered by leading 1031 exchange service provider LandAmerica Exchange Services (LES) has caused it to shutter its operations and stop taking new clients. The company explained to customers that it had been caught short in the sudden and precipitous fall off of the auction rate security market at the end of 2008. That market collapse left market participants little ability to determine the value of the securities, and thus the value of LES funds could not be determined and it was no longer able to borrow against those funds to keep its operation afloat.
The news was shocking to its customers. As a leading exchange services and part of a Fortune 1000 company, clients believed their money was safe. Additionally, these funds were in the LES as part of a short-term exchange arrangement, so they were not thought of particularly speculative or risk-laden investments.
Illusions come to an end
But the illusions of LES customers came to a sudden and sobering end, when the company announced in a letter dated November 28, 2009 that its losses were forcing the closure of the business. “LES has long invested 1031 deposits only in Investment Grade Securities Rated A or stronger, including auction rate securities backed by federally guaranteed student loans.
“Our goal for the exchange funds has been to maintain the full liquidity necessary to meet customer withdrawal demands. The auction rate securities in our exchange funds, which were sold to us by certain financial institutions, were highly liquid for many years. As has been widely publicized, the auction rate securities market froze earlier this year, and that extenuating circumstance prevents us from liquidating the auction rate securities held in the exchange funds,” said in the letter.
Some of the roughly 450 customers of LES filed suit in January 2009. The class action lawsuit alleges fraud on the part of the company and seeks $330 million in damages for claimants. But settlement will not be easy in the case. In May, a bankruptcy judge rules that the more than $200 million left in the account does not belong to customers, but rather it belongs to the bankruptcy estate and as such will not be distributed to the customers any time soon. “We understand that this situation is detrimental to you, and we can only assure you that we have taken every reasonable step possible to avoid the problem, including pursuing numerous liquidity options to no avail,” the letter continued.
The history of the funds
The customer deposit funds were in the LES account as part of a legal exchange that is arranged in order to deferred capital gains taxes on the proceeds from the sale of property. Both companies and individuals are allowed, under the IRS code, to defer capital gains if they exchange one property for another within certain time and other parameters. The funds in the account were the proceeds from the property sales, which were being held while the exchange was being conducted.
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