Umpqua Bank dragged into controversy over failed investment firm

By Jeff Manning
The Oregonian

July 15, 2009

In a 2007 presentation to executives at Umpqua Bank, Bend-based Summit Accommodators made what in hindsight many say is a stunning disclosure - that for years it had invested millions of clients' money ultimately into real estate ventures, many of them headed by Summit executives.

Summit's business was investing millions of dollars for clients while they conclude a real estate transaction known as a 1031 exchange. For Summit, the match of short-term deposits with long-term, illiquid investments seemed a recipe for trouble.

Sure enough, when the real estate market crashed in 2008, so did Summit. Stunned clients learned that more than $14 million of the cash they had deposited with Summit was unavailable.

Summit's court-appointed bankruptcy trustee is now dragging Umpqua into the center of the controversy. The trustee claims in a lawsuit that Umpqua aided and abetted a multi-year Ponzi scheme engineered by Summit's senior executives.

To all this, Umpqua reacts with outrage.

"No one at Umpqua has done anything wrong or assisted anyone at Summit in any wrongdoing," said Steve Philpott, Umpqua's general counsel. "It doesn't make sense to me that providing routine depositary services rises to the level of aiding and abetting a breach of fiduciary duty."

Philpott said the use of the phrase Ponzi scheme to describe Summit's operations is inflammatory and inaccurate. To claim that Umpqua supported such a scheme is baseless, he added.

Summit's bankruptcy trustee, Kevin Padrick, disagrees. In the lawsuit filed in Multnomah County Circuit Court last month, Padrick claims that Umpqua "materially assisted" what he calls the embezzlement of client money by Summit principals. It did so, he claims, by serving as a "depository for the continued flow of embezzled funds and by making substantial loans" to Summit principals and some of their real estate ventures.

"Umpqua did so," Padrick alleges, "because it reaped huge financial rewards."

Few laws or regulations govern what companies like Summit can or can't do with client money. Typically, the money is invested in a bank account, with the accommodator charging fees and keeping some of the interest earnings.

"I like to tell people that you need to be able to come up with the money in one business day," said Hugh Pollard, executive director of the Federation of Exchange Accommodators, a trade group. "It's common sense, it's someone else's money. But there's a lot of gray area in this business."

In that regulatory vacuum, it may well be difficult for Padrick to prove Summit executives let alone Umpqua Bank, did anything wrong.

Accommodators do primarily one thing - invest money for clients engaged in a so-called 1031 exchange. Named after a section of the U.S. tax code, 1031 exchanges are a hugely popular tax strategy that allows property sellers to defer capital gains taxes on their profits if they invest the proceeds in another qualifying property.

As the real estate market boomed earlier this decade, investors flooded 1031 accommodators with cash.

Summit, founded in 1991 by CPAs Mark Neuman and Brian Stevens, saw its assets peak at more than $120 million. Earlier this decade, Tim Larkin and Lane Lyons bought into the company, joining Neuman and Stevens as senior executives.

A 1031 exchange typically has to be completed in six months. So Summit, like all accommodators, controlled client money for a relatively short period of time.

Yet, in pursuit of larger profits, Summit started years ago investing a portion of its clients money into real estate ventures. Summit loaned money to Inland Capital Corp., owned by the four Summit's principals, which in turn funded dozens of real estate ventures. Much of the real estate was in Summit's home turf of central Oregon. But Inland's investments ranged throughout the western U.S.

As the company grew, Summit's four executives became well-known and respected in central Oregon's business community.

Summit never told its customers of the real estate investments, according to attorneys for the clients. In a copy of a Summit client agreement included in the bankruptcy court files, Summit pledged to deposit its clients cash "into one or more deposit accounts established with one or more financial institutions."

Privately, some Summit owners shared deep misgivings about their foray into real estate. In a series of internal e-mails included in bankruptcy court documents, they urged one another to divest themselves of the investments.

"If any word of it gets out, we would be ruined," Lyons said of the Inland funds in a Aug. 18, 2005, e-mail to Larkin. "I don't necessarily mean immediate financial ruin, but more importantly, our reputations and integrity."

They managed to work down Inland's debt to Summit from a peak of $28.6 million in 2005 to $13.7 million in 2008, according to court documents.

Summit is not the first accommodator to collapse in scandal. Since 2007, at least three other accommodators around the country have closed their doors, leaving a trail of angry clients who have lost tens of millions of dollars.

In 2005-2006, Summit moved the bulk of its banking business over to Umpqua. Padrick claims that Umpqua aggressively courted Summit. With more than $100 million in deposits and a constant stream of fee-generating client transactions, Padrick alleges, Summit was a rich source of potential revenue for the bank.

Soon thereafter, the two sides began exploring a closer relationship - a potential acquisition of Summit by Umpqua.

In March 2007, Summit presented a PowerPoint slide show to senior Umpqua officials discussing the merits of such a transaction. In addition to covering its history and rapid growth, Summit disclosed that it had put 17 percent of its assets into real estate ventures to boost profits.

Lawyers for Summit clients, who now refer to Summit's presentation as the "Ponzi PowerPoint," said the news should have raised alarm bells for the assembled Umpqua executives. Summit even disclosed to Umpqua that real estate investments had created a "liquidity" problem and that they needed a loan from Umpqua to Inland to address that problem.

Despite these revelations, "Umpqua continued to assist the (Summit) principals," Padrick alleges, agreeing to continue to serve as their bank and funding the Summit owners' real estate deals.

At least one of Summit's four senior executives controlled or had equity interests in most of the real estate ventures funded through Inland. The Summit "principals practically bragged that they had used the embezzled Exchange funds to build up a substantial net worth for themselves," Padrick said in the lawsuit.

Others argue that the very fact that Summit talked openly of its real estate deals to Umpqua shows that Summit executives didn't think they were doing anything wrong.

"If it was such a nefarious thing they were doing, why in the world would they disclose it all to Umpqua bank," asked Shawn Ryan, a Portland attorney representing Lane Lyons, one of the four Summit senior executives. "That tells me that the Summit principals' intentions were not bad intentions."

Umpqua never did buy Summit. And it never seriously considered Summit's proposal that Umpqua loan money to Inland so that Inland could pay its debt to Summit, Umpqua's general counsel Philpott said.

The real estate investments turned disastrous for Summit and its clients when the market crashed in 2008. The company closed its doors last December. Clients lost more than $14 million, according to court documents, and much more in lost deposits, lost tax benefits and other costs.

Padrick's case against Umpqua has gotten very nasty and very personal.

Bank officials are incredulous that Padrick included senior Umpqua executives, including CEO and Chair Ray Davis, in his lawsuit and that Padrick characterized the investments as a Ponzi scheme.

John Stewart, a Portland attorney working for Umpqua, said the effort to get money from Umpqua is nothing more than a "shakedown."

"If what Umpqua did was aiding and abetting, then every financial institution in the state is at risk," Stewart said.

Others side with Padrick, arguing that Umpqua's financial support kept Summit alive and allowed additional customers to be taken.

"Without the bank's assistance, (Summit) would have folded probably in mid-2007," said Martin Hansen, a Bend attorney representing several former Summit customers. "My clients put money with Summit after that." But for Umpqua, "they never would have been victimized."

Updated: Tuesday, November 03, 2009

Copyright 2009