Note from Ilena Rosenthal: For years, this newsgroup was plagued by
Patrick O'leary ... hiding behind various "implant support leaders" to
push the Inamed Junk Science Corporate View of breast implants.
Big swindle in the high desert
The Southwest Exchange litigation ensnares an array of businesses in
BY MATT WARD
On a breezy, Midwestern summer day last July, about 1,500 people
descended upon the Mitchell County Fairgrounds in the small town of
Osage, Iowa, to celebrate the city's 150th anniversary. A week-long
series of events culminated with the area's first All-School Reunion.
Area cattlemen and pork producers grilled up the fixings, while
dairymen served homemade ice cream. Alumni from as far back as the
1930s danced under the stars.
Three distinguished graduates were tasked with giving the keynote
speeches that day. One was George W. Bush's secretary of agriculture,
Mike Johanns, class of 1968. Unfortunately, he couldn't make it.
MARLENE KARAS | BUSINESS PRESS
Betty Kincaid, former owner of Southwest Exchange, talks about the
mess the business has become. She spoke at her attorney's office on
Feb. 5, 2007.
MARLENE KARAS | BUSINESS PRESS
The owners of breast-implant maker Medicor purchased Southwest
Exchange -- with disastrous results.
But two other guest speakers, a husband-and-wife team from Las Vegas
known for their local philanthropy, were delighted to come. High
school sweethearts who graduated from Osage High in 1952, the duo made
their family's fortune conquering the medical-device industry. They
were honored by the hometown crowd for the examples their lives set
for the youth of Osage.
A DIFFERENT EXAMPLE
Nearly a year later not many people, even in their tiny hometown, want
to be in Donald and Shirley McGhan's shoes. The couple is accused of
one of the largest, most brazen frauds ever alleged against a Las
Vegas financial institution. Along with daughter Nikki Pomeroy, son
Jim, longtime investment broker Peter DeMarigney, plus a number of
insurance companies, brokerage firms, a local bank and related
business associates, the couple are named as defendants in a
consolidated civil case. The suit alleges more than two-dozen acts of
malfeasance affecting victims in Missouri, California, Idaho, Arizona,
Nevada and elsewhere.
The FBI is investigating. So too are state agencies that failed to
detect the chicanery until more than 130 victims had lost more than
$100 million. Those victims are all landowners who placed the proceeds
from real estate sales into escrow accounts at the now-infamous
Southwest Exchange in Henderson, which abruptly shut its doors in
January. Instead of avoiding an IRS tax bill by parking their money in
a supposedly safe, bonded institution for 180 days, these victims lost
between $25,000 and $22 million each, some of which they will never
The attorney for a group of plaintiffs that says it was swindled out
of $22 million put it this way: "While this amount is astounding, the
story underlying the loss is even more astounding."
MEMORIES & MAMMARIES
After graduating from high school, Donald and Shirley McGhan went off
to the University of Iowa. He graduated in 1956 with a degree in
mechanical engineering. That year, the couple left for Midland, Mich.,
and fateful careers with chemical and plastics manufacturer Dow
Corning Corp. By 1963, Donald McGhan was head of the company's
medical-products facilities. It was here that he made his first claim
to fame: He helped invent the first generation of silicone breast
The couple left Dow Corning in the 1970s and moved to Santa Barbara,
Calif. They started a series of businesses there, each capitalizing on
Donald McGhan's expertise with medical devices, particularly the
implants. They had opened eight successive companies by the early
1990s. Their ninth was launched in Las Vegas, where they moved in 1992
with their adult children.
It was here they formed Medicor, which they often bragged was the
third-largest medical manufacturer of aesthetic medical devices in the
country. At one time, it employed about 400 people. Today, its doors
are closed and its Web site dormant.
The nearly three-decade moratorium on the use of silicone breast
implants ended in this country in the 1990s. The U.S. Food & Drug
Administration lifted the ban on the silicone devices after years of
controversy about systemic complaints caused by fluid leaking from the
devices. Thousands of women filed claims against the implant makers
and the assorted others involved in the product's conception,
manufacture and sales.
Eventually, Donald McGhan's former employer, Dow Corning, settled for
$4.25 billion, which forced it into bankruptcy. Donald McGhan, or one
of his companies, was named in over 400 individual breast-implant
cases, according to federal dockets going back to 1992. This was
merely the first -- albeit large -- sign of trouble for the McGhan
SIGNS & PORTENTS
In March 2000, Donald McGhan was forced to settle with the Securities
& Exchange Commission, which accused him of filing fraudulent
quarterly reports for the publicly traded Inamed Corp. in 1997. He was
the founder, chairman and CEO of the medical-device company when the
fraud took place.
The allegations mostly involved overstating profits by not accounting
for millions in intra-company transfers of inventory and tax assets
which should have been deducted from Inamed's earnings, but weren't.
Donald McGhan eventually lost his job with Inamed, paid a $50,000 fine
but admitted no wrongdoing. Then he left for his next venture ...
That company was started in 2000 and, until earlier this year,
operated out of an office at 4560 S. Decatur Blvd. The same address
would eventually show up in corporate registrations for other Donald
McGhan-controlled businesses, many nonexistent except on paper in the
Nevada Secretary of State's office.
Medicor was traded on the Over-the-Counter exchange, filing SEC
reports and generally reporting to investors that it was capturing up
to 30 percent of the market outside the U.S. for silicone-gel breast
Court documents allege that the Medicor filings from at least the last
two years are probably full of misstatements. Like many of McGhan's
past businesses, Medicor was teetering. When the company filed its
quarterly report in November 2006, it stated that Medicor sales jumped
68 percent. It even had a courtesy quote from COO Jim McGhan touting
the company's prospects.
What no one told investors, who are just now finding out is something
that happened two years earlier. The first thing Donald McGhan did
when he acquired Southwest Exchange was to set up a loan scheme to
funnel $47.3 million in Southwest Exchange funds to Medicor accounts.
Eventually, Medicor would get $70 million from a McGhan-controlled
company that was siphoning funds from Southwest Exchange.
A MISSING $1.5 MILLION
Betty Kincaid started Southwest Exchange in 1990, before the real
estate boom hit Las Vegas. When she sold it, real estate investors
were flocking to the city to profit from skyrocketing property values.
In 14 years, Kincaid's 1031 exchange accumulated nearly $110 million
in escrow accounts. Donald McGhan heard Kincaid wanted to sell and
knew it would be a golden opportunity to enter an industry lacking any
serious regulation, according to court records. All he'd need to
operate the business was a $50,000 bond and registration with the
state's real estate division, which doesn't have the statutory
authority to investigate exchanges, much less examine their books.
On June 12, 2004, Donald McGhan, his daughter and Medicor President
Theodore Maloney, now a civil defendant in this case, flew to Chicago
to meet Kincaid and make her an offer. Kincaid agreed to the terms --
$3 million cash and a 25 percent stake in Southwest Exchange's future
parent company, Capital Reef Management, as well as continued
employment with the exchange.
The transaction was completed on June 30, 2004, despite the fact that
more than $1.5 million was unaccounted for before Donald McGhan showed
up. According to court records, the patriarch, his family members and
various associates of Medicor took over Southwest Exchange trust
assets totaling $108,018,261. The company's liabilities, however,
totaled $109,682,365. The plaintiffs allege that ignoring the missing
money proves the McGhan clan was planning to loot the company all
Kincaid would stay on at Southwest Exchange for almost two more years.
She attempted to get Donald McGhan to open the exchange's books by
suing the company when she "developed concerns about how Southwest
Exchange was conducting business and managing its trust accounts,"
according to court filings.
Her concern, it seems, as well as her lawsuit, would soon dissipate,
along with the remaining 25 percent stake she owned in the business.
She sold it to Capital Reef for $3 million. For that, she is also a
defendant in this complex case.
By mid-2006, the end was near for Southwest Exchange. The housing
market was cooling. When Donald McGhan bought the company, only $30
million was required to keep the business humming along. Now more
escrow accounts were closing than opening. By late November 2006, at
least one former employee was alerting people to the eventual
collapse. No one listened.
McGhan had even acquired two other exchanges, Arrow 1031 in Boise,
Idaho, and Qualified Exchange Services in Santa Barbara, Calif.
Nothing stanched the collapse. Regulators were oblivious until
January, mostly because state lawmakers hadn't given them the tools
necessary to provide effective oversight. The Nevada Real Estate
Division canceled Southwest Exchange's license to operate, which was
all the agency could do. Investigators from Secretary of State Ross
Miller's office are still poring over records, looking for the lost
money and collecting evidence.
John Kelleher, a senior deputy attorney general, is set to prosecute
any eventual cases of securities fraud. "I'm one of many," he said.
"There are so many different aspects to this. Several state agencies
could prosecute them."
He said his investigators are responsible for "chasing the money." Of
that, he says, little has been recovered. Investigators may be far
from submitting their final report, on which he could base a criminal
"There was some money recovered. There's so many different companies,
so many entities," Kelleher said. "It's pretty outrageous."
Brandon Roos, an attorney for a group of plaintiffs, said he expects
the case to wend its way slowly through the system, although he hopes
victims will receive their money sooner rather than later. "It's going
to be a very complicated case. We're just now into it," he said. "We
don't know the full extent of this."
The cases against 15 or more defendants are presently in civil court.
But Roos made his thoughts clear on the pending criminal
investigations, saying, "They should all be in jail."
A LAWYERS' JACKPOT
Many entities were involved in the collapse of Southwest Exchange, and
many more are now ensnared in litigation because of it. Attorneys such
as Roos have identified 19 McGhan-controlled companies, as having
benefited from Southwest Exchange funds. Two internationally known
investment brokerages, Citigroup Global Markets and UBS Financial
Services, are also being sued for allowing DeMarigney to issue as much
as $59.3 million in fraudulent securities.
Silver State Bank, US Bank and title companies Equity Title and
American Title Corporation are also defendants. At least seven
insurance companies are not only being sued in District Court but in
Nevada and California federal courts as well. These defendants include
industry leaders Lloyds of London, State Farm, United States Fire
Insurance, Great American and Brown & Brown of California.
Many of Donald McGhan's businesses are in receivership, for which
court-appointed receiver Larry Bertsch and his attorneys had earned
well over $100,000 in fees as of early April.
AN ODE TO OSAGE
Donald McGhan is recuperating from a heart ailment in an undisclosed
location, his attorney recently told Forbes. For Osage residents who
are just now finding out about the Southwest Exchange swindle,
particularly those who benefited from McGhan's largesse, their hearts
are just breaking.
What exactly did Donald McGhan mean by his keynote speech on that
breezy, July day in Osage last year? He talked of Midwest values, of
dreaming big, of taking risks to find rewards. He told children to
mind their parents and to find heroes to emulate in their own
When told of the events unfolding in Las Vegas, one organizer of that
celebration last July, attorney Paul Demro, was rendered speechless.