Judge won’t dismiss claims

Clark County District Judge Elizabeth Gonzalez refused to dismiss claims against Brown & Brown of California, an insurance broker, and United States Fire Insurance.

Plaintiffs attorneys in Southwest Exchange lawsuits want to keep the insurance company and insurance broker as defendants, because the two defendants are seen as having “deep pockets” and could be forced to pay victims of alleged fraud.

Southwest Exchange, which closed in January, has few assets to satisfy about $95 million in claims from 150 investors.

The Henderson company served as an intermediary or accommodator under Section 1031 of federal income tax law. Accommodators like Southwest Exchange receive and hold proceeds from the sale of properties so that investors can delay payment of income taxes on gains from the property sales.

The investor later directs the accommodator to use the proceeds to buy another property for the investor. Investors rely on intermediaries, because they must pay income taxes immediately if they touch the money from a real estate sale. But investors found their money was gone when Southwest Exchange shut down.

Plaintiffs attorneys on Tuesday argued that Brown & Brown was liable because the insurance broker provided Southwest Exchange with an “evidence of insurance” document that led investors to think their assets were protected.

The plaintiffs contend that United States Fire Insurance is liable for the losses because Brown & Brown was serving as an agent for the insurance company.

Plaintiff’s attorney Brad Johnston quoted from the evidence of insurance document, which Southwest Exchange posted on the Internet. The document refers to a “fidelity bond program” and said the bond “insures against losses resulting from dishonest acts, such as embezzlement, conversion, fraud theft, etc. by the insured’s employees against the insured … (as well as theft by) partners and owners against the insured clients.” The coverage was listed as $50 million per incident.

About a dozen lawsuits contend that owners and officers of Southwest Exchange did steal money belonging to clients of Southwest Exchange, but the fidelity bond program did not protect clients of Southwest Exchange from losses.

“There is nothing untruthful about the language that (Johnston) read,” said Lawrence Borys, a Los Angeles attorney representing Brown & Brown.

Only insurance industry experts understood that Southwest did not have a bond to protect Southwest Exchange clients, said plaintiffs’ attorney Robert Brace of Santa Barbara, Calif.

Brace said Donald McGhan wrote an early version of the evidence of insurance document. Brace said Brown & Brown helped McGhan. Borys called the allegations “fantasy.”

Gonzalez denied the motion to dismiss Brown & Brown as a defendant.

The judge dismissed some of the claims against U.S. Fire but left others standing. The remaining claims include breach of contract, negligence, punitive damages and fraud.

The judge approved Robert Deiro & Associates to sell several properties that were obtained from former Southwest Exchange Chairman Donald McGhan and family members who are defendants in Southwest Exchange cases.

Michael Maggiore, a broker with Prudential Americana Group, said McGhan had selected him to list the properties for sale in February. Maggiore said he stood to lose commission on $18 million in real estate sales.

Anthony Zmaila, an attorney for the Southwest Exchange, said the McGhan family selected Maggiore and that Maggiore has a relationship with the Gentile DePalma Ltd., the firm representing the McGhans.

The judge was informed that Medicor Ltd. of Las Vegas filed for Chapter 11 bankruptcy protection on Delaware on Friday. McGhan also served as chairman of Medicor, a maker of breast implants and other surgical implants, and some Southwest Exchange money is believed to have gone to Medicor. The company said he doubts shareholders will receive any money from the bankruptcy.

Medicor stock, which trades on the Pink Sheets, closed at 5 cents Tuesday, unchanged from the day before.