Federal investigators looking at Bend investment firm

By Gordon Oliver
The Oregonian

January 08, 2009

To the surprise of nobody, federal criminal investigators are looking into the sudden collapse of Summit 1031 Exchange.

Ron Hoevet, a Portland criminal defense attorney, said in U.S. Bankruptcy Court hearing Thursday that Summit has been served with a federal Grand Jury subpoena. The FBI wants to interview certain company employees and also requested access to the company's records, Hoevet said.

The Bend company held more than $27 million in trust for clients while they completed 1031 real estate exchanges. That the case would go criminal seemed likely ever since Summit acknowledged that it has only about $13 million on hand of the $27 million it owes to clients.

Summit filed Chapter 11 bankruptcy in late December.

So-called 1031 tax-free real estate exchanges, named after a section of the IRS tax code, are a highly popular tax strategy that allows investors to sell real estate and defer the capital gains taxes as long as they use the sales proceeds to buy other qualifying real estate.

Summit held clients' money while they arranged the next transaction. Summit's four principals - Mark Neuman, Brian Stevens, Lane Lyons and Tim Larkin - have admitted that they did not invest all their clients' money in short-term, liquid securities as promised. Instead, they put millions of dollars went into various real estate deals.

"I suspect these individuals will face their own criminal issues," U.S. Bankruptcy Court Judge Randall Dunn said Thursday.

Several Summit clients objected to the company's request that it hire Hoevet to deal with the criminal investigation. They argue that the $35,000 Summit proposes to pay Hoevet is coming out of their pockets.

"They seem to have misappropriated our money," said Roland Andrews, of Montana. "And now they are asking us for more money for lawyers."

Susan Ford, a Portland bankruptcy attorney representing Summit, insisted that no client money would go to Hoevet. She predicted that not hiring Hoevet could end up costing clients more in the long term if, as a result of his absence, the federal investigation impedes the company's ability to finalize 1031 real estate exchanges.

Judge Dunn ultimately gave Summit permission to hire Hoevet. But he said clients will be given the opportunity to trace their money through the Summit organization. If it turns out that any of Summit law firms received client trust money, the firms would have to return it.

Copyright 2009