Files detail LandAmerica money woes

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Past stories on LandAmerica



LANDAMERICA INVESTIGATION

• Deposition of Ronald Ramos.
Ronald Ramos was vice president and treasurer at LandAmerica 1031 Exchange Services Inc. and senior vice president and treasurer at LandAmerica Financial Group Inc. in February when deposition was taken.



• Deposition of Stephen Connor
Stephen Connor was senior vice president of LandAmerica 1031 Exchange Services Inc. and LandAmerica Financial Group Inc. in February when deposition was taken.

In the weeks before LandAmerica 1031 Exchange Services Inc. declared bankruptcy, the company knew it had mounting money problems but continued to take on new customers and their money.

Company executives also issued a directive changing how customer cash was to be handled, but reversed that decision upon realizing it would make the firm unable to fulfill its financial obligations.

Also, in a bid to shore up the ailing company, Theodore L. Chandler Jr., president and CEO of parent firm LandAmerica Financial Group Inc., requested financial assistance from the secretary of the U.S. Treasury Department.

Depositions filed in response to bankruptcy litigation shed some light on the exchange company and its parent as both struggled to survive.

The two companies filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Richmond on Nov. 26 and since then customer money has been locked up in the bankruptcy estate.

On the day it filed bankruptcy, LandAmerica Financial announced plans to sell off its primary title insurers, which represented about 85 percent of company revenue. Since then, the Innsbrook-based firm has been selling off assets, closing subsidiaries and winding down operations.

Much of the depositions' details revolve around a weekend in October when company executives reversed policy upon learning the company could run out of money.

"I suspect we have a week, two at most, before the Exchange Company runs out of cash if we make all remaining [holding company] cash available," Ronald Ramos, vice president and treasurer of the exchange company, wrote in response to an e-mail.

The Friday, Oct. 17 e-mail was to Michelle Gluck, executive vice president and chief legal officer for LandAmerica.

Gluck, who now serves as senior vice president and general counsel for the Federal Reserve Bank of Richmond, had recently ordered that customer money be placed in segregated accounts, rather than lumped into one commingled account holding money belonging to multiple clients.

That note followed a policy change earlier in the month by exchange company Senior Vice President Stephen Connor in response to a new Treasury regulation.

On the Saturday after Ramos told Gluck that the company faced insolvency, the two called Connor. Chandler and Chief Financial Officer G. William Evans were also on the line.

In a deposition, Connor testified that he was asked why the commingled account was dwindling. Connor said it was because they had switched to a default policy where money went into segregated accounts.

"[Ramos] shared with me that we needed to -- that the balances in the commingled structure were low, and we needed to fund those transactions in order to provide liquidity," Connor said during the deposition.

Connor testified that Ramos said the company needed the money to continue flowing into the commingled account to maintain its financial viability and meet other obligations.

The default segregated account policy was reversed days later, and Connor had some marketing material about the company's financial stability removed from company Web sites.

Conner also said Ramos told him during that conversation about the problems the company had been having with its investments in auction rate securities, which created the liquidity problem that eventually forced the companies into bankruptcy.

During the course of the bankruptcy case, clients of the exchange company have said they believed their money was held in trust by LandAmerica and did not belong to the estate. The company disagreed, as did Bankruptcy Judge Kevin R. Huennekens, who ruled customer money belonged in the LandAmerica estate and the clients would be considered creditors.

In testimony, Connor talked about marketing material used to showcase the company. One document had a passage labeled "Funds Held in Trust."

Connor, an attorney, said company literature did not mean trust in a legal sense but in more of a "pedestrian manner."

"It sounds to me like they misrepresented how they were holding the money," said Mary B. Foster, president of 1031 Services Inc. in the state of Washington and past president of the trade group, Federation of Exchange Accommodators. "The word trust has a lot of meaning to it legally."

Connor's interpretation doesn't sit well with Kurt Wallach, who placed $5.5 million with the exchange company days before it declared bankruptcy and now faces a $700,000 capital gains tax bill from the IRS.

"We gave it to them in trust," Wallach said. "There's no other way to say that. There is no distinction to be made here at all."

More than 100 fraud complaints have been leveled against the company in bankruptcy court.

Named for the Internal Revenue Service Code 1031, a 1031 exchange company holds money from the sale of investment property while the seller looks for another replacement, or exchange, property in which to invest. If the sale is finalized within 180 days, capital gains taxes are deferred.

The company used new exchange money to complete exchanges involving other customers, Ramos said during his deposition.

The exchange company allowed customers to place their money in a variety of ways: in escrow, in a separate, segregated account or lumped in with other money in a commingled account. For the most part, save for a few weeks in October, the money went into the commingled account when customers didn't specify the type of account.

Commingled money was typically invested or used to pay out other exchanges, Ramos said.

"If there was ever a mathematical definition of a Ponzi scheme, I think you have it," said Paul Busse, whose wife placed money with LandAmerica in August after selling some investment property. "We had always been under the impression we were duped in a Ponzi scheme."

It's not uncommon for large financial companies to pool money, several experts said.

"Some funds do pool funds," said Foster, whose group rescinded LandAmerica's membership after the bankruptcy filing. "If it was always liquid, it wouldn't be a problem."

The exchange company ran into money problems when it could not access exchange funds invested in auction-rate securities, which were marketed as highly liquid investment tools. The market for auction rate securities dried up in February 2008, one of the early casualties of the financial crisis last year.

At the time of the bankruptcy filing, 450 exchange customers had placed more than $419.2 million with the company. About $200 million was held in auction-rate securities until the auctions for them failed.

"That was a very bad business practice to be exposed in that way," said Richard B. Chess, president of American Realty Capital Markets LLC and former president of Richmond Association of Business Economics. "It wasn't unethical. It wasn't illegal. It was stupid."

Contact Emily C. Dooley at (804) 649-6016 or edooley@timesdispatch.com.