Bulk of money lost in Southwest Exchange case expected to be recovered

The receiver for Southwest Exchange, a Henderson-based financial intermediary that failed two years ago, and plaintiffs attorneys expect to recover 90 percent or more of $98 million lost by investors, attorneys said Tuesday.

If the remaining defendants and plaintiffs settle their cases, Clark County District Judge Elizabeth Gonzalez may not need to hold a jury trial.

Southwest Exchange held money for real estate investors who wanted to delay federal income taxes under Section 1031 of the Internal Revenue Code.

The federal law allows investors to use the proceeds from a property sale to buy another piece of property while delaying gains from the sale.

To qualify for tax deferral, investors must entrust the sale proceeds to third-party intermediaries, or accommodators, while looking for another property to buy.

Southwest Exchange became insolvent in January 2007 while holding $98 million in cash for investors from 136 transactions.

Southwest Exchange owner and operator Donald McGhan looted money from the company and used some of the money to buy a French breast implant maker for Medicor Inc., his public company, according to court papers.

Attorneys for investors and receiver Larry Bertsch have been negotiating for claims mainly against third parties but also some individuals, including McGhan.

Among those agreeing to settle lawsuits were Lloyd's of London, Greenwich Insurance Co., Citigroup Global Markets, UBS Financial Services, insurance brokerage Brown & Brown, Continental Insurance, Federal Insurance, former owner Betty Kincaid, US Fire Insurance Co., Great American Insurance Group and Theodore Maloney, former chief executive of Medicor.

Negotiations are continuing with Snell & Wilmer, the law firm that previously represented Southwest Exchange, said class action attorney Robert Brace of Hollister & Brace of Santa Barbara, Calif.

"Most complex fraud cases don't end so well," Brace said.

Settlements so far total about $90 million, and that may increase. In addition, the receiver has recovered 24 properties that were entrusted to Southwest Exchange.

"We think it's very unusual (to get back so much of the losses), and we're very happy," said plaintiffs' attorney Stephen Peek of Holland & Hart.

Peek told Clark County District Judge Elizabeth Gonzalez on Tuesday that he hopes the parties can reach settlements with other defendants, eliminating the need for a jury trial.

"The fact that the plaintiffs and receiver worked well together led to this result in a relatively short time," said receiver's attorney Anthony Zmaila of Santorro Driggs.

Attempts to reach McGhan's defense attorney failed.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.