Class action suit targets LandAmerica, SunTrust

A $330 million class-action lawsuit accuses LandAmerica 1031 Exchange Services and Sun Trust Banks Inc. of defrauding clients by using their money to pay off other clients.

The lawsuit, filed Wednesday in U.S. District Court for the Southern District of California by four LandAmerica clients on behalf of about 400 customers, characterizes the companies' actions as a Ponzi scheme.

It alleges SunTrust allowed LandAmerica to take money from exchange customer accounts and give it to other clients whose money was locked up in auction-rate securities, a type of investment once considered safe. It says the firms either engaged in or allowed the breach of fiduciary duty, the commission of fraud, and intentionally did not disclose vital information.

The complaint is the latest in a string of lawsuits and filings made after the exchange company and its Henrico County-based parent, LandAmerica Financial Group Inc., filed for bankruptcy protection Nov. 26. Since then, 60 complaints, many alleging fraud and breach of contract, have been filed against the exchange company in U.S. Bankruptcy Court in Richmond.

The lawsuit also names two LandAmerica 1031 Exchange executives, Stephen Connor and G. William Evans. Evans also is chief financial officer for LandAmerica Financial Group.

LandAmerica officials could not be reached for comment, and SunTrust officials declined to answer questions.

"We have not seen the lawsuit, so it is inappropriate for us to comment," said Mike McCoy, a spokesman for SunTrust Banks.

LandAmerica's exchange company served as a legal tax shelter for investors who sold property and wanted to park the money somewhere while looking to reinvest. So long as the money was held by a third party and then reinvested in a similar property within 180 days, the capital-gains taxes were deferred.

The transactions are sanctioned by the Internal Revenue Service, but the third-party companies that offer the exchanges are not regulated or certified.

The lawsuit claims that LandAmerica used money from new customers to pay off older customers whose money had become inaccessible because it was invested in auction-rate securities, a type of credit that froze in February.

"Once that market failed, [LandAmerica Exchange Services] should have shut down," California attorney Robert L. "Rusty" Brace said. "Our money was used to pay those other exchangers."

SunTrust was named because it is the bank customers were told would hold their money, according to the lawsuit.

At the time of the LandAmerica bankruptcy filing, 450 customers were owed more than $383.6 million.

About half the money was held in individual accounts, while the other half was held in commingled accounts, holding funds from more than one customer.

The class-action suit represents the 400 LandAmerica customers whose money was lumped together in a single account and invested in auction-rate securities, said to be reliable, liquid investments until the market dried up in February.

To deal with cash-flow problems, LandAmerica Financial Group lent its subsidiary $65 million.

Brace filed the lawsuit in California, where one of his clients is located.

Class-action lawsuits representing more than 100 people in multiple states with more than $5 million in claims can be filed in federal court. The suit seeks a jury trial.

The suit filed Wednesday is the third class-action lawsuit Brace has filed against bankrupt exchange companies. He said customers owed $151 million from The 1031 Tax Group, which operated out of Richmond, thus far have recovered nothing, but customers with the Nevada-based Southwest Exchange Co. settled for $85 million. The Southwest clients were owed $97 million, Brace said.

Contact Emily C. Dooley at (804) 649-6016 or .