Capital Loss

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Escrow Funds Vanish; Inamed Founder Accused of Embezzling Millions

by Martha Sadler

A  class action lawsuit filed against a Montecito financial company alleges that it, along with an affiliated company in Nevada, “misappropriated, stole, embezzled, and converted” more than $80 million from escrow accounts within the past year. One of the chief defendants named in the lawsuit is Donald McGhan, 73, who was the founder, chairman, and president of the McGhan Medical Corporation, maker of silicone breast implants and for many years one of the region’s top employers. McGhan left the company — now called Inamed Aesthetics — in 1998, and the company later settled a fraud suit filed by the Securities and Exchange Commission alleging that McGhan had filed false financial statements that misled the investing public. His son, James McGhan, who with his father founded a plastic surgery products company called Medicor Ltd., is also a defendant in the recently filed class action suit.

In addition to Medicor, the McGhans own or control a Delaware corporation called Capital Reef Management, according to the suit filed February 16 in Santa Barbara County Superior Court by the local law firm of Hollister & Brace. In October, Capital Reef purchased Qualified Exchange Services (QES) — a small company located at 1115 Coast Village Road in Montecito — founded by Kyleen Dawson and Megan Amsler. After selling QES, the two founders remained as employees of their former business. Three months later, they reported to the FBI that some of their clients’ funds were missing. They are also named in the suit as defendants, although their attorney, Craig Grenet, said the incident hurt them as well as their clients. “They are just as much victims of this as anybody,” Genet said.

The attorney for the plaintiffs, Robert Brace, disagreed, calling Dawson and Amsler negligent for failing to protect his clients’ money. However, he seemed to reserve his greatest scorn for the McGhans, repeatedly referring to them — and to one of the other defendants, accountant Dean Koch — in the text of the lawsuit as the “thief defendants.” Koch was the chief financial officer of Southwest Exchange, Inc. (SWX) of Nevada, where Donald McGhan served as chairman of the board of directors, a company that became an affiliate of QES as a result of the Montecito company’s sale to Capital Reef. SWX and QES were both in the business of 1031 exchanges, which are the perfectly legal practice of avoiding capital gains taxes by exchanging one piece of property for another of equal or greater value instead of liquidating the asset. If the new property is purchased within six months of selling the first property, the seller does not have to pay capital gains — but during the interim, the money must be placed in trust, and that is where the exchange agents come in. They hold the money in trust for a fee.

The primary plaintiffs in the suit against QES and SWX are Jon and Marie Sorrell, who sold a home in Lake Arrowhead for about $720,000 on September 8, deposited the money from the sale in trust with QES, and then identified a house in Santa Ynez that they intended to buy with those proceeds. In late January, though, QES told them that the money was “no longer available.” Since then, according to the suit, plaintiffs have been told that QES is out of business. Calls to QES were answered by a recording but not returned.

On February 5, SWX and its three chief officers, including Donald McGhan, were suspended by Nevada’s Division of Real Estate. The collected assets were placed in receivership, following numerous complaints of missing funds. McGhan’s attorney, Mark Dzarnoski, said he had not yet been served with a copy of the class action suit.

Brace estimated that of those claiming to have lost funds, about 10 Santa Barbara-area residents are missing a total of about $10 million in assets entrusted to QES. Brace added that unlike banks, which are federally insured, and escrow companies, which are heavily regulated, exchange intermediaries are largely unregulated and uninsured. Most of their clients are probably unaware of that distinction, he said.

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