Ed Okun - The Real Story

The key ingredient of Ed’s plan was his ability to make immediate decisions to execute on opportunities as they presented themselves … no Board, no Partners, no red tape delays.  Understandably, this method required immediate access to both short and long-term financing and Ed had arrangements with recognized sources that knew him and his methods and were willing to advance his funds on an immediate basis, so long as there were sufficient assets available to pledge as collateral for these loan advances.  Of course there was a “cost” for this flexibility and immediate liquidity – transaction fees and higher short-term interest rates – but the returns on these investment projects proved to be more than sufficient to absorb the higher transaction costs, and Ed considered them as an acceptable part of business life.

 

Ed was then able to arrange and secure long-term permanent financing after closing the requisition deal for the property he was rehabbing or developing.  Ed’s strategic plan then expanded to developing reliable sources for both short and long term financing on a more attractive cost basis.

 

Ed had previously obtained “mezzanine” or intermediate financing for the Richmond Square Mall in Richmond, Indiana from an Ontario, California based bank that advanced him the funds from its affiliated “Qualified Intermediary” (QI).  After the development was completed, Ed then sold the project out to a group of qualified investors using a vehicle called a “TIC” (for tenants in common).  Ed maintained management control of the project and the passive investors received their promised returns.

 

Recognizing the potential financial advantages of both of these business structures, Ed identified several potential QI’s to acquire (for short-term financing) and a publicly traded broker dealer to take advantage of TIC syndication (for long term financing).  Proceeding in parallel, Ed acquired 52% (controlling interest) in Montauk Securities Inc., a publicly traded broker-dealer with 900 sales reps and was set to take control of Montauk on May 2, 2007, when he planned to install Louis Roger’s as the new President.  Rogers had developed the concept of a TIC and had shepherded the program through all of the regulatory requirements resulting in the IRS issuing Revenue Procedure 2002-22, with the “safe harbor” provisions for utilizing the TIC vehicle.

 

At the same time, Ed established the 1031 Tax Group LLC as a holding company to centralize the management and operation of a series of QI’s he was acquiring during 2005-06.  He ultimately acquired six (6) QI’s, (in Boston, New York, Texas, San Antonio, Denver and San Jose) to provide a core network for the QI business on a national basis.  He was also evaluating a potential QI acquisition in Chicago to add to the constellation of coverage of the 1031 tax group.

 

Lastly, Ed was one of only five (5) individuals qualified as a Tier 2 borrower at Wachovia Bank.  Ed has an approved individual borrowing capacity of $150 million, secured by his real estate assets, as necessary.  By the 3rd Quarter of 2007, all of the pieces would be in place and the sky was the limit.  Ed had also become an American Citizen in July of 2004 and was now well positioned to pursue this American Dream.

 

The Dream becomes a NIGHTMARE

 

The QI industry is totally unregulated.  It is also populated with some less than honorable personalities.  Unfortunately for Ed, he encountered at best three (3) QI executives of somewhat questionable integrity.  Ed purchased his first QI entity for his 1031 Tax Group venture in August of 2005.  He acquired Atlantic Exchange Company (AEC), headquartered in Boston.  While the seller, Patrick Dowdill, remained in operational control of AEC, Ed continued his business development program, and used short term advances of funds from AEC to allow himself to take advantage of certain opportunities.  These advances were fully documented loans paying 8% interest to the QI for use of the funds, and the advances were well secured by Ed’s substantial net worth.

 

Ed purchased his second QI for 1031 TG, SOS 1031 Exchange, from Todd Pajonas in November 2005.  SOS 1031 was located in New York, but when Ed noticed that AEC was not meeting his expectations, he installed Pajonas as chief executive overseeing both QI businesses.  Unfortunately for Ed, Pajonas seemed to forget that he had sold the business, and that the QI funds were no longer his to use as he, Pajonas, saw fit.  Ed eventually discovered that Pajonas was systematically diverting funds that should have been deposited into approved company accounts at Citibank, Wachovia, and Bank of America, into “secret’ accounts controlled by Pajonas at Long Island State Bank and other institutions.

 

Pagonas was subsequently terminated, and an audit was commenced to identify and locate the diverted funds.  As noted below, the audit was never completed.

 

In the meantime, Ed had purchased a third QI, Florida-based Real Estate Exchange Services LLS (“REES”) from Morgan and David Sheffman in April of 2006; and a fourth QI, National Exchange Services LLC (“NES”), based in Texas, from Bill Bennett in June 2006.

 

As the 1031 Tax Group was now reaching its critical mass, Ed solicited several legal studies and formal opinions to solidify his planned practice to utilize the QI funds on a short term bases in his other business activities.  He also asked the operating executives and legal counsel to formalize and standardize the QI contracts to expressly describe his intended use of the funds and to expressly disclose to exchange customers that their funds, during the interim exchange period, were the property of the QI and that those funds were not kept in specifically segregated accounts.  In fact, the QI relies on the use of the deposited funds as a major source of its operating revenue, and tax laws require that and exchange customer NOT have ownership or control of the sale proceeds deposited with the QI in order to receive the favorable tax-deferred treatment envisioned in the exchange transaction itself.

 

As Ed completed the last two QI acquisitions for 1031 TG, he had the selling executive remain in local control of their operations.  Unfortunately for Ed, these two new executives, Janet Dashiell (Seller of California based 1031 Advance Inc.), and Daniel McCabe (sellers of Denver based Investment Exchange Group LLC) continued the operating practices pioneered by Pajonas, and also systematically diverted QI funds into their own self-controlled "secret" bank accounts, unknown to Ed.  There were even two sets of books maintained at the direction of Dashiell after she was made chief executive or President of the entire QI operation.  McCabe opened at least one secret account at Colorado State Bank, when he was Director, on December 6, 2006, shortly after Pajonas had been terminated on November 30, 2006.  Dashiell opened her own "secret" account at Countrywide Bank on March 28, 2007.

 

Meanwhile, Okun was actively completing the acquisition of Montauk and his substantial real estate activities were being managed within Investment Properties of America (“IP of A”), which generated significant operational cash flow.  It is a tribute to the financial strength of Okun and his organization that the “diversion” (theft) of QI funds was absorbed by Ed’s normal cash flow and didn’t become a “serious” problem until the cumulative amount of these diversions reached the $50 million level.  QI operations continued to be funded and closed in the normal course of business, in spite of the financial crises (real or imagined) being precipitated by Dashiell and McCabe in an attempt to trigger a default.

 

Once this “problem” was detected, Ed sent his auditors to Denver, which was the QI operations center.  McCabe had hidden all references to the “secret” accounts and had obscured records in the exchange account transaction files.  However, there were cumulated transactions identified and auditors from the PENTA Group hired by Okun’s CFO David Ford were unable to classify and review over 16,000 “intercompany” transactions.

 

Realizing they were about to be discovered, Dashiell and McCabe went to the Justice Department and attempted to throw the blame on Okun for the missing funds.  (See Time Line)  An aggressive rogue Assistant U.S. Attorney, acting in concert with the thieves, then shut down Okun’s operations – without any legal authority – before executing a search warrant obtained under the false pretenses and based on perjured testimony.

 

Acting like a Rhinoceros in a rainstorm, the government proceeded to completely muddy Okun’s business operations by seizing all the records which caused massive transactional defaults in the QI business and destroyed Okun’s outside business as well as stopping the cash flow and refinancing efforts that would have kept all the businesses running smoothly, while the stolen funds were being identified and recovered.

 

Government interviews and secret recordings confirm that these government officials knew Okun was about to take control of Montauk.  But, in order to justify the precipitous actions of shutting down the business without authority and to force the defaults, the government served their warrant on April 27, 2007 at Okun’s Richmond operations center, effectively destroying the business.

 

How did this happen?

 

Dashiell and McCabe were aware of the legal analysis Okun had commissioned regarding the use of QI funds.  The last part of the opinions noted that as long as transactions closed and there was no default, even the most pessimistic or conservative legal interpretation would be satisfied.  Recently that analysis was confirmed in the Land America Case, decided in Richmond in 2009 which ruled that as a matter of law funds deposited with a QI were the property of the QI, and not assets of the exchangers who deposited the funds.  Therefore the QI had operational and discretionary control of the funds.

 

In order to cover their treachery and make their case for the government, Dashiell and McCabe had to precipitate a default which was scheduled to occur on April 20, 2007.

 

Dashiell had created a “phony” transaction which she used to drain $7.5 million of QI funds on deposit at Citibank, which she transferred to her “secret” account at Countrywide and hid from Okun.  Okun’s attention had been absorbed with the MOTAUK transaction, but when he was informed that $5.4 million was needed for a closing scheduled in the next 48 hours, as precipitated by Dashiell, he dropped everything and obtained the necessary funds to close, arranging for a $7.1 million loan advance which closed in the then 48 hours, and his organization was fully prepared to complete the exchange transaction.

 

What is the Problem?

 

After Ed Okun acquired his first QI, (AGC), and during the negotiation periods for the acquisition of other IQ’s, there were discussion about the proper use and investment of QI funds, on an interim (short-term) basis, during the transition period.

 

Okun had previously obtained a short term loan in the amount of $3.9 million from an unrelated California based QI in April of 2005.  These funds were used for the “mezzanine financing” phase of Okun’s acquisition of the Richmond Square Mall, so Okun believed that not only were QI’s a legitimate source of short term financing, but that several QI’s could be consolidated into a viable profitable business venture.

 

Okun was of the opinion that funds were under the management discretion and control of the QI until needed to close an exchange transaction.  Now, as an owner of QI’s, Okun commissioned a series of legal opinions as to the propriety of using QI funds.  The first of this analysis was conducted by Okun’s in-house counsel, Eric Perkins, and was delivered on November 7. 2006.  The analysis was inconclusive so Perkins followed up with a second memo on November 21, 2006 which incorporated an incorrect fact pattern and therefore the conclusion was in error.

 

Okun then sought outside counsel for a formal opinion.  In November 2006, Ed went to Richard Simring of Jordan-Burt in Miami.  Simring referred Okun to Kluger, Pertz, Kaplan, Berlin (“KPKB”) and KPKB was engaged in late November 2006 to issue an opinion.  In a December 4, 2006 opinion, KPKB advised that as long as funds were available to close exchange transactions in the normal course of business, everything was proper.  Subsequently, a Richmond, Virginia bankruptcy court confirmed that funds deposited by exchange customers became the property of QI, which was able to invest them for its own account.  By law, the exchanger had no claim on the funds until they were disbursed at the closing of the exchange transaction.  Indeed, under the IRS regulations, the whole concept of a tax-deferred exchange using a Qualified Intermediary requires that the exchanger not have any interest or control over the funds deposited with the Qualified Intermediary during the interim period, in order to avoid the realization of a taxable event.

 

In Search of the Missing Funds

 

Okun’s organization was beginning to suspect financial irregularities as there were constant “financial crises” being created – first by Pajonas, then by McCabe and Dashiell.  Because of the strength of Okun’s finances, these crises were handled in the normal course of business.  It wasn’t until the diversions (theft) reached the range of $50 million that Okun started to pay more attention to this problem.

 

Okun first sent his head bookkeeper, Jeff Zacharias from the Indianapolis base of the Real Estate Management Company (IP of A) to New York to review the financial situation in the business managed by Pajonas.  Zacharias was to complete a review of the financials for year end 2005 and then compile the records for 2006 year-to-date.  Okun also hired David Field as his new CFO in August of 2006.  Field, a CPA, had been the Senior Tax and Audit Partner at Cherry, Bedchart and Holland, in Richmond, Virginia.  Field examined the work of Zacharias and then engaged the PENTA Group to review the situation and begin a compilation for 2006, year-to-date.  By February of 2007, PENTA determined that the Zacharias work papers were incomplete for 2005 and 2006 and that there were over 16,000 inter company transactions that had not been analyzed or examined.

 

I’m from the Government and I’m here to help

 

Dashiell and McCabe were actively conspiring with a rogue prosecutor in the Justice Department and a lying Postal Inspector to precipitate the crisis needed to shut down Okun’s organization and shield the treacherous executives in an attempt to escape responsibility.  The Prosecutor planned to shut down the out-of-town operations in California, Colorado and Texas and, as confirmed by Dashiell in her trial testimony, “I stayed until they told me I could go”.  On Wednesday, April 25, 2007 Dashiell abandoned her California office and “resigned” as President of the 1031 Tax Group.  On Thursday, April 26, 2007, McCabe closed the Denver offices and send a press release that he had been “fired”.  The San Antonio office was simultaneously shut down that week.

 

However, following his “solve the immediate problem first” philosophy, Okun had obtained the funding to close the transaction that was supposed to be the trigging default event on Friday, April 20, 2007.  He was also about to draw the first $40 million of his $250 million financing package, and on May 2, 2007 he set to take operational control of Montauk.  This was no financial crises at all!

But, the government had other plans.  Without any legal authority, they had shut down operations in California, Colorado and Texas.  From their interviewers and wiretaps they knew of Okun’s imminent financial closings as well as about Okun’s net worth (from the Field interview).  In a panic, Postal Inspector, John Barrett Jr., who had conducted all the key interviews and prepared the writings, signed an affidavit of  probable cause, which contained many false and misleading statements, in order to justify a sealed warrant issued by Magistrate Judge Lauck, in Richmond, Virginia on April 26, 2007.

 

Armed with this warrant, Federal Officials raided Okun’s Richmond offices on Friday, April 27, 2007, sized all the operating records, and effectively shut down Okun’s business, precipitating the very crisis they had planned and hoped to use to justify their actions.

 

Prior to the government raid, NOT ONE SINGLE TRANSACTION HAD FAILED TO CLOSE.

 

After the government raid, NO TRANSACTIONS CLOSED.

 

The Justice Department issued a press release proudly describing their actions.  In fact, they had effectively shut down all of Okun’s operations, without benefit of legal authority, then seized his records based on a perjured warrant affidavit, finally indicting and convicting Okun for “stealing” exchangers’ money and operating a Ponzi Scheme.

 

In fact, it was the government agents, in cooperation with the treacherous executives, Dashiell and McCabe, that caused all the damages.  By the way, Postal Inspector Barrett, whose false affidavit prompted the major damage, chose early retirement in an attempt to escape responsibility for the damage he caused. Dashiell and McCabe received federal immunity for their cooperation, but have never accounted for the $50 million they admitted stealing.

 

Justice Denied

 

The government has actively concealed and suppressed the exculpatory information needed to vindicate Okun.  At trial, Okun was precluded from presenting any of the above information.  The government keeps custody of the banking records and statements and has never even tried to audit the accounts.  A cursory review of some of the records graciously released by the government confirms repayments by Okun of substantial amounts of money advanced from the QI’s.  Records even reveal transfers from the Pajonas operated, New York based SOS QI to accounts that McCabe controlled in Colorado.

 

Okun has been held in jail since his arraignment and has been denied access repeatedly to the evidence needed to prepare for his restitution hearing, for his sentencing report, and for his ultimate appeal of this travesty of justice.  Recently the government even tried to retrieve the limited information Okun had been able to review.  The government, in another demonstration of the “win at all cost”  mentality recently condemned by Attorney General Eric Holder, still has not even performed a cursory review or analysis of the financial and operating records seized from Okun’s offices in 2007.  The “secret” accounts maintained by McCabe, Dachiell, and Pajonas remain un-reviewed with the records still in the hands of the thieves.

 

The Bottom Line

 

As a result of the planned deceptions of the government and its cooperating witnesses, hundreds of people directly, and thousands indirectly, have lost well-paying jobs related to Okun profitable business enterprises.  Exchange clients of the QI’s lost over one hundred million dollars of escrowed funds needed to complete tax deferred exchanges.  Additionally, the tax consequences including interest and penalties resulting from the government engineered defaults will cost exchange victims possibly another $100 million.  Investors in IP of A properties managed by Okun have seen their properties and projects destroyed by the actions of these culpable government officials.  Their losses total in the hundreds of millions of dollars.  Finally, Okun himself has had his life ruined, his assets plundered and now finds himself facing the potential of a long prison term.  His business was destroyed based on theft, perjury, and the actions of a rogue prosecutor.  He was convicted of “crimes” that the Land America case confirms are not even crimes at all, based on evidence manufactured by perjury and deprived of a valid defense that was suppressed and not even admitted at his trial.

 

A Shining Star

 

The actions of the government forced Okun to put his business empire in the hands of a Trustee under an agreement overseen by the U.S. Bankruptcy Court for the Southern District of New York.  The Trustee has dissipated many of the assets, destroyed significant value, sold off valuable properties for a pittance, and charged exorbitant fees.

 

But all is not yet lost.  As a result of the Trustee's actions, in suing Okun for breach of the terms of his Asset Transfer Agreement, the door has now been opened for Okun to fight back.  In an Adversary Proceeding in the bankruptcy court, the government does not have immunity, cannot suppress evidence, and the rogue prosecutor and lying Postal Inspector now face individual civil liability for their actions.  They must fund their own defense, as Okun was required to do in his criminal trial, without benefit of taxpayer funding.

 

The Bonding companies who issued fidelity Bonds in favor of Okun and his businesses will now be called upon to underwrite the losses caused by defalcating executives Dashiell, McCabe and Pajonas.  Colorado Capital Bank, where McCabe was a Director, also has fidelity Bond coverage what will be called to mitigate some of the damages.

 

Even though McCabe, Dashiell and Pajonas may have received federal grants of immunity, they are subject to state criminal proceedings for theft and embezzlement, and the Attorneys General of Colorado, California and New York will soon become involved.

 

If a rogue prosecutor can manufacture a case based on lying witnesses and perjured testimony and destroy a man with hundreds of millions of dollars of net worth, imagine what could happen to you if someone set out to get you.

 

 

 

 

The progress of this case can be found through the PACER system at the following locations:

 

The Criminal Proceeding:                            U.S. v. Edward Hugh Okun

3:08 CR 132 Eastern District of Virginia

 

The Bankruptcy Proceeding:                            In the 1031 Tax Group LLC

07-B-11448 (MG) Southern District of New York

 

The Anderson Proceeding:                            09-01231 (MG) Southern District of New York

Land America                                                        08-35994 (KRH) Eastern District of Virginia

Financial Group              08-03131 (A Judiciary Opinion) Eastern District of Virginia

 

What is a Ponzi Scheme

 

In a Ponzi scheme, participants are promised very attractive returns in order to entice them to participate.  In a Ponzi scheme, there is no underlying business activity to generate these returns.  Instead, the promised returns are paid to early investors from the funds of later investors.  Obviously, with no generator of value, the Ponzi Schemer eventually runs out of money because he runs out of new investors whose funds are needed to pay off earlier participants.

 

Okun operated a financial enterprise with hundreds of millions of dollars of tangible value.  He added this value with management skill and capital investment to produce substantial gains for his investors.  His personal net worth exceeded one hundred million dollars and was pledged to secure his activities.

 

What is a Qualified Intermediary?

 

A Qualified Intermediary (QI) is a third party that receives the sale proceeds from an “exchange” client who seeks to defer the tax consequences of a sale of property by transferring the original cost basis from the “sold” property into a new property (the “exchange” property).  The QI holds the sale proceeds in its own name, pending the closing on the exchange property.  Under Section 1031 of the Internal Revenue Code, the exchanger must identify the exchange property within 45 days of the sale and must close on the exchange property within 180 days to realize the tax benefits.

 

What is a TIC?

 

TIC stands for Tenants in Common and is a passive investment vehicle limited to 35 or fewer qualified investors.  It allows small investors to pool their resources and spread the risk by investing in larger scale, credit worthy projects which are beyond the reach and resources of industrial investors.  Under the safe harbor provisions of Rev Procedure 2002-22, a TIC qualifies for a 1031 tax deferred exchange treatment.  A TIC allows the “small” investor to participate in “large” programs.