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Tax Exchange Ponzi Ends With $25 Million Hole And Criminal Pleas
Written: November 19, 2012

Logo of the Internal Revenue Service

Logo of the Internal Revenue Service (Photo credit: Wikipedia)

If you are lucky enough to have sold a business or property and realized a gain, the damn Internal Revenue Code (“IRC”) requires you to pay tax at the time of the sale. You know what they say about death and taxes, right?

Well, hold on a sec because there’s good news: Under an exception set forth in IRC Section 1031, you may be able to postpone paying the capital gain tax if you reinvest the proceeds in similar property as part of what’s known as a qualifying like-kind exchange. No, you don’t avoid paying the tax altogether but you can put off that painful event.

What’s a “like-kind exchange” you ask?  Ahhh . . . the line forms to the left for that bedeviling query and there are lots of different answers.  As noted in the IRS publication: “Like Kind Exchanges Under IRC Code Section 1031″:

[T]he disposition of the relinquished property and acquisition of the replacement property must be mutually dependent parts of an integrated transaction constituting an exchange of property.  Taxpayers engaging in deferred exchanges generally use exchange facilitators under exchange agreements pursuant to rules provided in the Income Tax Regulations. .

Of course, if you don’t get the whole like-kind thing just right, you could find yourself in hot water with the Internal Revenue Service.

If you are contemplating a like-kind exchange, it’s best to talk to a tax professional. This isn’t the kind of thing that you necessarily want to undertake a la amateur hour — I don’t suggest that you try find the answers online or looking something up on TurboTax. Call a CPA or lawyer, or at least callH&R Block. Whatever you do, do not rely upon this article for any tax advice.

1031 Qualified Intermediary

All of which brings us to Vesta Strategis, based inSan JoseCA.  Seems that Vesta held itself out as a qualified intermediary for the purpose of conducting tax-deferred IRC §1031 exchanges. Vesta promoted a transaction requiring the deposit of proceeds from an investment real estate sale with the supposedly qualified intermediary, and those proceeds would be rolled over into a new qualifying investments during a 180-day statutory period without capital gains taxation.

SIDE BAR: Cast of Characters

  • John D. Terzakis was the majority owner and controlling person of Vesta, which he owned through Single Site Solutions Corp., Willowbrook, IL (a company that had managed land-development and commercial real estate projects in the Chicagoarea).
  • Robert E. Estupinian was the former Chief Executive Officer and minority owner of Vesta until approximately December 2007.
  • Peter Ye, was the former vice president of operations and subsequently president.

Terzakis and Estupinian fraudulently solicited and caused others to solicit prospective clients to deposit funds with Vesta. Among the misrepresentations made was that that Vesta would hold those deposits and return them as promised. Instead, the defendants stole client funds for their own use, and utilized the old Ponzi scheme by which new client deposits were diverted to pay redemptions owed to earlier clients.

Terzakis, Estupinian, and Ye purportedly fraudulently asserted that Vesta:

  • was a safe and financially secure Section 1031 exchange company,
  • client deposits would be held by Vesta, and
  • client deposits would be returned at the time of redemption.

Timber!!!

Terzakis and Estupinian sued each other in federal court in San Jose, blaming one another for misappropriating Vesta client deposits. In July of 2008 with approximately $25 million owed to its depositors, Vesta collapsed because it lacked the ability to meet its redemption obligations.  In August, 2009, a federal civil class action was filed in San Jose federal court against Terzakis, Estupinian and others by Vesta clients alleging misappropriation of their funds.

Indictment

On December 30, 2009, a San Jose federal grand jury indicted Terzakis, 52, of Hinsdale, IL, and Estupinian, 47, of San Jose, CA, on 12 felony counts of wire fraud, money laundering, and conspiracy to commit wire fraud and money laundering.  Terzakis and Estupinian were arrested on January 6, 2010.

The maximum statutory penalty for each count of

  • wire fraud and conspiracy to commit wire fraud: 20 years imprisonment, a fine of $250,000 or twice the gross gain or twice the gross loss to any victim, and restitution;
  • money laundering, and conspiracy to launder monetary instruments: 10 years imprisonment, and a fine of $250,000 or twice the amount of the criminally derived property involved in the transaction.

Additionally, Terzakis and Estupinian faced a $24,633,341.34 forfeiture .

On June 21, 2010, Ye; on February 2, 2011, Estupian; and On February 23, 2012, Terzakis, respectively each pled guilty to three felony counts: conspiracy to commit wire fraud, wire fraud, and money laundering.

On September 27, 2012, Terzakis was sentenced to 84 months in prison and ordered to pay full restitution, in an amount to be determined by the court.

On November 15, 2012, Estupinian was sentenced to 66 months in prison and ordered to pay full restitution, in an amount to be determined by the court.


 
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