Southwest Exchange investors could see some cash returned

Real estate investors who lost $95 million when Henderson financial intermediary Southwest Exchange failed in January appear poised to get at least some of their money back.

UBS Financial Services has agreed to make a $23 million settlement payment on behalf of real estate investors who lost money to Southwest Exchange, according to a letter on the Web site of Santa Barbara, Calif., law firm Hollister & Brace.

Peter John DeMarigny, a former stock broker for UBS and other firms, handled financial transactions for Southwest Exchange, according to a federal class action lawsuit. Multiple accounts at UBS were used to launder money from Southwest Exchange, the lawsuit claims.

U.S. District Judge Robert Jones will be asked to preliminarily approve the settlement, the letter said. The parties also are expected to need approval from Clark County District Judge Elizabeth Gonzalez, who is handling the receivership case for Southwest Exchange and related lawsuits.

The letter does not mention when the recovery may be distributed to some or all of the 130 individuals who entrusted money to Southwest.

Plaintiff Robert Brace declined to comment, saying the Nov. 7 letter spoke for itself. Other attorneys involved in 15 state lawsuits over Southwest Exchange also said they were not at liberty to comment. Attorneys for UBS did not return calls for comment, and a spokesman for UBS did not return a call for comment Thursday afternoon.

Southwest Exchange, operated by Donald McGhan, was an accommodator, or qualified intermediary. Real estate investors, who want to delay paying federal taxes on gains from sales, often direct buyers to send money directly to intermediaries such as Southwest Exchange. When the seller is ready to buy a replacement property, he directs the intermediary to use proceeds from the previous sale to make the purchase. Investors must not take possession of the money, or the Internal Revenue Service will tax them immediately on the gains.

Rather than operating legally, McGhan directed a Ponzi scheme in which money from later investors is used to pay early investors, according to the plaintiff's lawsuit. McGhan and other defendants denied many of the allegations in lawsuits over Southwest Exchange.

Defense attorney Mark Dzarnoski, who represents McGhan, declined comment.

Southwest Exchange bank balances exceeded $215 million in 2005, giving the company enough money to close on replacement properties for clients, although $75 million had been diverted, according to the lawsuit.

"In late 2005, the real estate market cooled, which meant that money from the declining number of new exchanges was going to be insufficient to pay for the close of the increasing number of older exchanges," the court papers say.

Southwest Exchange started to have a cash crunch, but the lawsuit said that McGhan and others continued the Ponzi scheme by purchasing Qualified Exchange Services of Santa Barbara and stealing $10 million to $12 million belonging to QES clients.

Since the collapse of Southwest Exchange, real estate investors have become more cautious about choosing intermediaries to hold proceeds from real estate transactions, said turnaround professional Lanis O'Steen.

Investors often turn to title companies to serve as intermediaries. "They have got assets that are available to back their commitments and to go through with the funding of these exchanges," O'Steen said.

Southwest Exchange, however, was registered with the state but had virtually no assets when it closed in late January.

In other recent developments, a bankruptcy judge in Delaware has given creditors of Medicor Ltd. until Monday to file a claim.

McGhan was chairman of Medicor, a publicly held breast implant company in Las Vegas.

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