Three co-owners of Bend-based Summit 1031 Exchange are headed to federal prison.
U.S. District Judge Anna Brown on Monday sentenced Summit 1031 co-founder Mark Neuman, of Bend, to 78 months in prison.
Summit co-owners Timothy Larkin, of Redmond, and Lane Lyons, of Bend, each received 54-month sentences.
Each defendant must self-report to prison on Feb. 24, U.S. Attorney’s Office spokeswoman Gerri Badden said. The Federal Bureau of Prisons will determine where each will serve his sentence.
A jury convicted Neuman, Larkin and Lyons of wire fraud and money-laundering conspiracies in July, following a 17-day trial.
Prosecutors said the defendants funneled $75 million from Summit 1031 clients into personal real-estate investments between 1999 and 2008, using a shell company they founded, Inland Capital Corp.
Attorneys for the defendants argued the men didn’t break any laws in place at the time and never meant to cause clients any financial harm.
But prosecutors said Neuman, Larkin, Lyons and fellow Summit co-owner Brian Stevens misled clients by investing their funds in real estate across Central Oregon during the early 2000s, despite saying in company pamphlets and on Summit’s website that client funds would sit in insured bank accounts.
Stevens pleaded guilty to identical charges in April 2011 and started serving a four-year prison sentence last year. A grand jury indicted the other defendants in June 2011.
Neuman and Stevens founded Summit in 1991 as an exchange accommodation company, which helps clients defer capital gains taxes after selling a property for a profit. Larkin and Lyons joined Summit in 2006.
Section 1031 of the federal tax code lets sellers put off those capital gains taxes if they reinvest the proceeds in a similar property within 180 days.
Clients can’t touch the funds during the 180-day period, though. Exchange companies hold the funds during the interim, and bring in revenue from service fees and interest that accrues as the funds sit in bank accounts.
Summit’s business ran smoothly through much of the 2000s, as Central Oregon’s real estate values kept climbing.
The Summit co-owners would take client money, transfer it to Inland Capital, then invest it in property throughout Central Oregon. They would then sell older properties at a profit, transfer those funds from Inland to Summit, and return the funds to clients.
But Summit’s business model began to fall apart in 2007 as Bend’s red-hot housing market sputtered. Facing a drop-off in clients and growing debt from its real estate investments, Summit filed for Chapter 11 bankruptcy in December 2008. The bankruptcy filing cost 91 clients $13.7 million at the time, according to U.S. Bankruptcy Court documents.
The loss of those funds prompted the U.S. Department of Justice to subpoena Summit’s records in early 2009, and the FBI launched an investigation shortly after.
This summer, Stevens testified against the other Summit defendants in court. In late October, a federal judge re-sentenced Stevens to time served, according to court documents, meaning he’s no longer in prison.
Neuman, Larkin and Lyons will likely have to pay restitution in addition to their prison sentences. Badden said a restitution hearing would be held at a later date.
— Reporter: 541-617-7820, firstname.lastname@example.org