Capital Loss

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.