By New Times
By Connor Radnovich
By Robrt L. Pela and Amy Silverman
By Ray Stern
By Keegan Hamilton
By Matthew Hendley
By Monica Alonzo
By Monica Alonzo
Canadian law obligates financial-planning firms to perform "due diligence" on investments prior to selling them to clients. Magellan paid for "due diligence" junkets to Phoenix. Planners stayed at the finest hotels and enjoyed expensive meals and guided tours of Phoenix, according to the April 1999 issue of Vancouver Magazine. (The junkets were also confirmed to New Timesby other sources.)
The Schroeders wonder just how diligently the vacationing financial planners checked out Magellan.
The Schroeders did not know, for instance, that one of Magellan's owners, Les Litwin, had been sued in the mid-1980s in British Columbia in connection with a real estate scandal unrelated to Magellan. According to the Vancouver Sunand Vancouver Magazine, a British Columbia judge ruled that Litwin had fabricated sales figures to obtain a loan. (Zorro's got the judge's ruling posted on the Web site, of course.)
Linda Schroeder says if she'd known Litwin's history, she and her husband never would have paid $20,000 for an interest in Silverwood and Cross Creek Limited Partnership, a Magellan project that involved two California properties.
As "limited partners" in the Silverwood-Cross Creek partnership, the Schroeders entrusted their money to Magellan, the "general partner," which managed the partnership and its property.
The Schroeders' financial planner told them they would reap at least an 8 percent return on their investment and would recoup their entire investment plus a nice profit, in two years.
But so far, the Schroeders say they've recovered only $2,373 of their $20,000 investment.
Linda Schroeder says communiqués from Magellan about the partnership's finances have been "vague and unclear."
"This has been very difficult for us. All of our money is tied up, and we have a huge mortgage to pay," she says.
The Schroeders don't know where to turn for help.
Magellan is in Phoenix.
The Schroeders live in Canada
The properties are in California.
And Vantage Securities, which employed the financial planner who sold the Schroeders the Magellan investment, is bankrupt.
"I would never invest in a limited partnership again," says Linda Schroeder.
"I am very leery about investing now.
"It's really a scary thing. What a lesson we've learned the hard way."
Complaining of inexplicably puny returns and unusually high management fees, some investors sought the protection and help of regulators.
In 1996, the Arizona Attorney General initiated a criminal probe of Magellan. The AG issued a search warrant alleging that Magellan principals might be guilty of fraud and tax-law violations. (The search warrant is posted on the dissident Web site.) A grand jury was convened, but no one was indicted in connection with Magellan. Three years later, the criminal probe seems to have gone nowhere. Now the AG's office, which won't comment on the case, says in letters to investors that it hopes to settle the matter "civilly."
Irate Canadian investors figure the AG has ignored them because they aren't Arizona taxpayers.
After hearing of the proposed civil resolution, Alberta investor Colleen Diederichs fired a letter back to the AG's office on June 25.
"The idea of negotiating a 'civil resolution' to this matter is tantamount to a slap on the wrist . . . ," she wrote, expressing fears that any fines levied on Magellan by the AG would be paid with investor money.
". . . I wonder why you don't fine us directly for gullibility," Diederichs concluded.
"The AG is slower than the Second Coming," complains British Columbia resident Bud Sawatzky, who invested $200,000 in Magellan projects in the mid-1990s.
Sawatzky, a retired director of aircraft sales for a Canadian airline, claims he's recovered only $65,000 of his $200,000.
When asked to comment on the AG's investigation, Resnick writes in the October 22 letter: "Magellan has been cooperating with the AG's office for three years. The last time they requested information was more than one year ago."
"For whatever reason it [the AG's investigation] came to a grinding halt," says Dave Linder, executive director of the Alberta Securities Commission. "The only thing that would drive this thing forward in my view would be the State of Arizona saying, 'Canadian investors are so important to us,' assuming they have the case, of course, 'that we feel we want to pursue this matter.'"
Unlike the AG, Canadian regulators have already taken some action against Magellan.
Although Magellan publicist Resnick contends there was "no action" taken against Magellan in British Columbia, the British Columbia Securities Commission confirms that in 1997, it issued a Cease Trade Order against a group of Magellan companies for failing to file required financial documents. That order is in effect today, but it doesn't satisfy all investors.
Mike Bernard, spokesman for the British Columbia commission, says the bulk of the regulatory responsibility rests in Arizona's hands.
"I don't know what the answer is when matters fall between the cracks of jurisdiction," he says. "Given that many of the actual properties are in Arizona, it's seen as primarily a matter for the Arizona regulator."
"We have no power to do anything in Arizona per se," he says. "We have to rely on the good graces of the Arizona authorities."
Investors got the same response from Alberta regulators.
In January, the Alberta Securities Commission concluded a three-year investigation of Magellan by banning the companies from selling securities in Alberta until the year 2001. Magellan also paid the commission a $44,000 fine.