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Thursday, January 25, 2001

FBI probing
of $2 million
at isle firm

By Rob Perez

Federal authorities are investigating the disappearance of money that several customers kept at a Honolulu company so they could complete tax-free property exchanges, an attorney representing the firm's owner says.

The missing money allegedly was taken by one and possibly two associates at Conduit Exchange Corp., and the whereabouts of one of those associates is unknown, according to Michael Green, who represents owner J. Allen Johnson. A person familiar with the case said more than $2 million likely is missing.

Neither Green nor Johnson would name the associates, one of whom admitted taking money, according to Green. He said the FBI has been investigating the allegations for several months.

The FBI did not return phone calls yesterday seeking comment.

Green said Johnson wasn't involved in the disappearance of the money. "Allen Johnson never took a penny," Green said.

Conduit Exchange is a company that holds money for customers conducting what are called 1031 property exchanges. An owner who sells an investment property but wants to avoid paying capital gains taxes can place the proceeds with a qualified intermediary like Conduit Exchange and then use the funds to acquire a replacement property within a specified time, according to Internal Revenue Service regulations.

For tax purposes, the transaction -- if it meets all the regulations -- is considered a property exchange, freeing the owner from capital gains liability.

Green said the missing money was intended to complete four exchange deals. Without the money, the deals could not close, Green said. "These people got screwed."

Other deals were unaffected, he added, and there's a possibility money will be returned to the four affected accounts.

Johnson, on advice from Green, declined to answer questions about the missing money or his two associates.

IRS spokeswoman Shawn George said her agency has no rules pertaining to what an intermediary must do with such money while a property exchange is being arranged.

No state except Maryland imposes regulations on how such money is handled, according to Johnson, who said he has taught real estate-related taxation courses for 23 years.

He said money deposited with an intermediary is controlled by the intermediary, but the funds must be available when the property exchanges are ready to close.

State officials contacted yesterday said they were unsure whether any Hawaii regulations govern how qualified intermediaries handle exchange money.

Johnson said he formed Conduit Exchange in 1980. The company does about 150 to 200 property exchanges a year, he added.

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