Found money’s fate unclear in Southwest Exchange case

The Nevada Secretary of State, which has traced $110 million transferred out of failed Southwest Exchange of Henderson, has not determined how much of that money investors who relied on the financial company can recover, a spokesman said Wednesday.

The Secretary of State’s Securities Division traced $110 million to various brokerage accounts, bank accounts and other businesses. But the division does not know the balance in those accounts, Deputy Secretary of State Chris Lee said.

“We did not want to get in the way of the receiver,” Lee said.

Receiver Larry Bertsch, whom a Clark County district judge appointed, is responsibile for recovering money and distributing proceeds to investors, Lee said.

So the state agency turned the information over to Bertsch to use in trying to recover the money. Bertsch and his attorney did not return calls for comment Wednesday.

The Secretary of State’s office on Tuesday announced that it traced the money from Southwest Exchange, but Lee, the interim securities administrator, could not be reached for comment at the time of the announcement.

Southwest Exchange, which closed in late January, was a qualified intermediary for real estate investors. The company held profits that investors made on the sale of property so that the investors could delay paying income taxes on the profits.

Under federal law, investors may delay taxes by using the profits to buy another real estate property, but investors may not handle the money themselves and often rely on so-called qualified intermediaries or accommodators like Southwest Exchange. When investor finds a new property to buy, he or she directs the intermediary to send the money to the seller of that property.

Southwest Exchange, however, closed in late January without releasing millions of dollars held for 130 investors.

The Securities Division in February issued a cease-and-desist order against four former executives with Southwest Exchange, arguing that they and the company should have been licensed as a securities broker-dealer and should have registered the securities they were selling.

Some lawyers question the legal theory that Southwest Exchange and its officers were required to obtain brokerage licenses and file securities registrations. The Securities Division’s order points out that Southwest Exchange promised to pay up to 5 percent interest when an investor entrusted more than $500,000 with the company.

Southwest Exchange also invested the investors’ money in stock brokerage accounts. The order notes that Southwest Exchange in July 2005 transferred $37 million in stocks and bonds from Morgan Stanley Dean Witter to UBS Financial Services.

Lee declined to say whether other qualified intermediaries also may be required to obtain securities licenses and register securities.

Attorneys for some former Southwest Exchange clients privately acknowledge that the Secretary of State’s office is acting against Southwest Exchange while the Real Estate division has done little. But they fear treating Southwest Exchange as a securities dealer and the money as securities will harm their clients.

Named as defendants in the Securities Division action are Southwest Exchange and former Southwest Exchange officials Donald McGhan, Albert Conton Jr., Dean Koch and Nikki Pomeroy.

The Securities Division is expected to hold a hearing its cease-and-desist order in one month on behalf of McGhan and Pomeroy.