The scam allegedly set up by former Santa Barbara businessman Donald Kay McGhan was a complex process involving &#82201031 exchangesC and shell companies, according to a class-action lawsuit filed by the Santa Barbara law firm of Hollister & Brace.

At least 130 people in a dozen states lost a reported ,80 million in the scheme, the suit claims.

According to the suit, McGhan set up a scheme to funnel money from companies called &#8220exchange accommodatorsC to firms he owned or controlled, including Southwest Exchange, also known as SWX, of Nevada and MediCor, a medical device company based in Las Vegas that formerly had an office in Santa Barbara.

McGhan was, at least for a time, chairman of the board of SWX, according to the suit.

The scheme revolved around what are called &#82201031 exchanges,C whereby a commercial property owner may sell his appreciated property and avoid paying capital gains taxes as long as he buys another property of roughly equal value within 180 days.

To do that, funds from the sale cannot be received by the seller but must be held in trust by a third party, which then disburses the money for the purchase of the replacement property.

That third party can be a bank or insurance company, which are government regulated, or an exchange accommodator, a type of business that is not regulated.

The lack of governmental regulation is where the risk lies in using exchange accommodators rather than a bank or insurance company, according to Michael P. Denver, one of the plaintiffs/ attorneys.

Exchange accommodators do not have to provide clients with an accounting of fees, interest and operating expenses, making them ripe for fraud.

According to the lawsuit, money held in trust by SWX was funneled to shell companies McGhan set up to launder the funds, which were then withdrawn for his and his accomplices/ benefit.

Because the real estate market was hot in 2004 and 2005, money coming in for new 1031 exchanges could be used to cover funds deposited for previous exchanges that McGhan and his cohorts had already raided, the lawsuit claims.

But when the real estate market suddenly cooled at the end of 2005, the number of 1031 transactions declined and not enough money was coming in to cover the embezzled funds, according to the suit.

By April 2006, the scheme began to unravel as SWX faced liquidity problems, the lawsuit states, and by October 2006, approximately ,70 million was missing from the trust funds.

The lawsuit claims Qualified Exchange Services, a Santa Barbara exchange accommodator, was purchased that month by Donald Kay McGhan, son Jim J. McGhan, daughter Nikki M. Pomeroy, Nevada investment broker Peter John DeMarigny, who was employed by Salomon Smith Barney, and Nevada resident Dean A. Koch, the chief operating officer and chief financial officer of SWX.

Together, they allegedly raided ,10 million in 1031 exchange funds from QES before the scheme finally collapsed in January, according to the lawsuit.

According to the lawsuit, many of the victims not only lost the funds from the sale of their properties but also now must pay capital gains taxes on those funds because they failed to complete the purchase of similar properties.

And because some of them were under contract to buy replacement properties, they are now in default on those contracts and liable for additional damages to the sellers.

March 18, 2007