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Jon Schink sold property in Portola Valley and reinvested the money in rental property in Southern California.
Millions of dollars in real estate investors' money has apparently disappeared with the collapse of a firm that helped investors in Silicon Valley and elsewhere buy and sell property and defer paying capital gains taxes.

1031 Tax Group of Richmond, Va., which operated in San Jose as 1031 Advance, filed for bankruptcy in New York City over the weekend. But even before then, it had become the subject of investigations by the U.S. Postal Service and U.S. Attorney's Office in Virginia.

The company specialized in an increasingly popular property transaction known as a "1031 exchange," in which the role of intermediaries such as 1031 Tax Group are not regulated.

The firm's bankruptcy filing lists huge creditors, including a couple from Los Altos who trusted the company with $10.6 million, and a Portola Valley woman who handed over $3.3 million.

"I was depending on this income to live off. This has entirely changed my life," said Candace Graham, 58, of Portola Valley.

The creditors also include Florenzio Martinez, 77, of San Jose, who had deposited more than $400,000 with 1031 Advance while preparing to invest it, and Jon Schink of Palo Alto, who lost $276,000.

"It is my life savings," said Martinez. "I want to get to the bottom of it, but I'm hoping for the best. I'm hoping there's no criminal activity going on."

In 1031 exchanges, investors may defer capital gains taxes if they sell and buy property - it can be real estate, art or even livestock - within a rigid 180-day time period. To delay paying taxes, investors must place the money with a third party - an arm of a bank, perhaps, or a title company. Or, they can entrust the money to an entity called a qualified intermediary, until the deal is done.

In these transactions, such intermediaries hold onto the money until the investor identifies the new property and closes escrow. The 1031 Tax Group was one such qualified intermediary with offices in San Jose, Denver, San Antonio, Boston and White Plains, N.Y.

Despite the fact that these qualified intermediaries handle large sums of money, they're not regulated either at the state or federal level, except in Nevada. Often, however, investors choose a qualified intermediary because it is less expensive than a bank or title company.

In San Jose, the company had an office on The Alameda from November 2005 until its principals, Steven Allred and Janet Dashiell, closed up and left at the end of April.

Both Allred, who led Old Republic Title's exchange company for many years, and Dashiell are well-respected in their field, said those who dealt with them. Late last year, they sold their company to the 1031 Tax Group but had stayed on to run the office.

Since their abrupt departure, their customers have been unable to reach them, or discover what happened to their money.

Why she quit Dashiell's lawyer, Washington D.C.-based Anjali Chaturvedi, said Dashiell quit the firm after she became "increasingly uncomfortable with how the company was being operated."

"She has done nothing wrong," Chaturvedi said. "Her concern has always been and continues to be that of her clients." She said Dashiell is cooperating with federal investigators.

Allred's attorney, Steven Kimball of Sacramento, said, "Mr. Allred no longer owned the company and he was not in any way a controller or a manager; he was an employee. He left the company voluntarily."

Saturday's Chapter 11 filing in U.S. Bankruptcy Court in New York said that the 1031 Tax Group owes its 20 largest unsecured creditors $68.9 million and estimated its debt from more than 300 open exchange contracts at around $151 million.

1031 Tax Group suffered a liquidity crisis when banks froze some accounts opened by local branch employees and after Edward Okun, who owns the privately held business, borrowed about $132 million to invest in other businesses he controls, said the company's chief restructuring officer, James Lukenda.

Phone message Before the filing, Okun agreed to personally guarantee the debts his other businesses owe 1031 Tax Group with a pool of real estate assets.

Calls to Okun and other company executives by the Mercury News in recent days were answered with a recorded message asking clients to be patient, and that the problems would be solved.

1031 Tax Group has missed some closing dates requested by customers because it lacked cash and its financial records aren't organized, said Lukenda, an executive at Huron Consulting Group who was hired to reorganize the company.

Attorney Norman Kinel of the Dreier law firm, who is representing 1031 Tax Group, declined to comment.

Okun purchased six qualified intermediary businesses between August 2005 and December 2006 for about $27.5 million, "rolling up" regional intermediaries into a national firm, court papers said. According to the papers, Okun blamed the underperformance of recent acquisitions for the filing.

That's hardly an acceptable explanation for the victims, some of whom were experienced with 1031 exchanges.

Graham said Dashiell came highly recommended to her, and the two of them handled a 1031 transaction about a year ago that went very smoothly. The second transaction occurred when Graham sold a building in Palo Alto that she'd owned for about 20 years. But she became alarmed when the $3.3 million that was supposed to be wired for a deal did not arrive.

Graham says she doesn't understand why the IRS offers a transaction that allows investors to defer the taxes but does not regulate the industry where the money is supposed to sit for 180 days.

"When (Dashiell) sold 1031 Advance, she did not tell her clients," Graham said. "It's an unregulated business. This needs to be regulated. It's not just me. There's hundreds of people out there."

Martinez is among them.

"I'm not hurting for money," he said. "It's just that my brain has taken a beating." Martinez owned a rental house he purchased in 1957 for $8,000 and sold it for $440,000 in March. He planned to take the money and invest in three buildings.

He knew something was wrong when his accountant called to tell him the money from the sale of the house had never been wired to complete his transaction.

Schink, a 50-year-old Palo Alto commercial real estate investor and general contractor, had a similar experience. Though he normally uses banks with 1031 exchange departments to handle these transactions, this time - with the advice of friends who knew Allred - he went to 1031 Advance, he said.

Payment not made In March, Schink sold property he had in Portola Valley for $808,000 and reinvested the money in rental property in Southern California. Two of the three payments from his account at 1031 Advance were made. But a few weeks ago, when he discovered the last deposit for $276,000 had not been transferred to close escrow on the deal, he became alarmed.

He said he contacted 1031 Advance but got no response. He left more messages. Nothing.

When alerted about the bankruptcy filing Monday, he said, "Surprisingly, I'm comforted by the fact that I think we're going to have judicial supervision. We spent a month in the unknown. ... At least now I hope their troubles haven't gotten so extensive that the courts can't salvage something."

Schink also said he has called a bankruptcy attorney to discuss his options.

"I'm not in the top 20 creditors. Your heart goes out to the guy in Los Altos who lost over $10 million."

Bloomberg Wire Services also contributed to this story. Contact Katherine Conrad at or (408) 920-5073.