Straits of Magellan

In 1995, Walt and Linda Schroeder mortgaged their home in British Columbia, then took $20,000 and invested in what they thought would be a terrific real estate deal with an Arizona company.

Now they doubt that they will ever get all their money back.

The Schroeders were not particularly savvy investors. Walt Schroeder is an elementary school teacher. Linda Schroeder, a former furniture saleswoman, now stays at home to care for her grandchild.

But the Schroeders trusted their Canadian financial planner, who suggested the Schroeders invest in a limited partnership that would own American real estate managed and developed by the Magellan Companies, a Canadian-owned, Phoenix-based real estate conglomerate. Magellan consisted of a maze of subsidiaries that developed, managed and sold properties in Arizona and California. Two of its owners, Les Litwin and David Dewar, are Canadians who reside in Phoenix. In April 1999, Vancouver Magazine reported on how Litwin and Dewar lived extravagantly in Arizona. In divorce proceedings, Litwin's ex-wife accused him of high living and lavish spending. The third owner, Kenneth Losch, lives in British Columbia.

Today, Magellan has offices at 2777 East Camelback. It purports to have 42 properties worth more than $500 million, but company officials will not reveal its net worth. Magellan is currently planning a $75 million gated apartment complex at Greyhawk in north Scottsdale.

Like Ferdinand Magellan, the 15th century Portuguese navigator who died while sailing around the world, Magellan investors have been in uncharted waters for a very long time.

Some disgruntled investors say the apartment buildings, condos, raw land and office buildings Magellan purchased in the mid-1990s should have been good investments, but that something has gone terribly wrong. At the very time investors should be reaping excellent returns, they say they have gotten mere pennies back on their original investment dollars. The angry investors accuse Magellan owners of mismanaging the properties, and, in some cases, wrongfully taking money out of one project to pay expenses for another, which, investors say, is illegal.

Magellan says such allegations are "without merit."

Investors want justice but claim they can't get it.

They are bitter with what they see as regulatory lassitude in Arizona and Canada alike. Some vow to resort to theatrics, like organizing a demonstration of hundreds of Canadian investors at the office of Arizona Attorney General Janet Napolitano, whom they accuse of ignoring their allegations of fraud and misconduct.

Others simply have decided to take matters into their own hands by supporting stateside receiverships, filing a fraud lawsuit, demanding forensic audits and actual takeovers in which management of some properties has been wrested from Magellan companies.

Anonymous Magellan detractors have even put up an Internet site (www.members.tripod.com/magellaninfo/) where a shadowy figure known only as "Zorro" posts damning public records detailing Magellan's problems.

"My research into this 'Magellan Thing' has been ongoing now for over a year," Zorro writes on the Web site. "I have undertaken the task of helping the peoples of two countries -- the Canadians and the Americans . . . I have tried to bridge the information gap."

Zorro also targets Magellan's three Canadian owners, whom he calls the "Three Amigos."

"Guess what, Magellan's Three Amigos," Zorro writes to Litwin, Dewar and Losch, the Magellan owners, "you failed to realize the Power of the Internet, you also failed to realize that you moved into Zorro Country. . . ."

In an October 22 letter to New Times, Magellan spokeswoman Denise Resnick writes that the Web site "was created by a small group of highly emotional and vindictive investors who knowingly cite inaccurate information and who refuse to identify themselves publicly . . . This small investor group is not fully informed and it's clear they don't want to be."

Magellan is combating those "highly emotional and vindictive" investors by attempting to liquidate all properties that involve such small investors. Magellan has initiated libel lawsuits against three critics in Canada. Magellan says it plans to file a defamation lawsuit against the Web site's provider. The company is also attempting to regain control of a trust that holds 11 properties, including five in the Valley -- Northwood Village Apartments, Maryland Meadows Apartments, Las Palmas Apartments and Canterbury Hills Apartments in Phoenix, and Dobson Springs Apartments in Mesa.

Despite repeated requests, Magellan's attorneys and principals would not grant interviews for this story.

New Times submitted detailed questions to Magellan's attorney, Ivan Mathew, on October 8. Mathew did not answer the questions, but referred New Times to Resnick, who set up an interview with Magellan owner Ken Losch. But an interview scheduled for October 26 was cancelled on short notice. (Resnick says attorneys advised Magellan not to meet with New Times.)

In the mid-1990s, Magellan aggressively sought the very Canadian investors who now have become its harshest critics.

Magellan paid 12 percent commissions to financial planners who sold interests in dozens of real estate projects to Canadian clients. Most investors lived in the provinces of Alberta and British Columbia in western Canada.

In all, about 6,000 Canadians are thought to have invested about $100 million in Magellan deals. (All dollar figures in this article pertain to American, not Canadian dollars.)

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 Times by 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 Sun and 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.

In a settlement agreement that documents apparent improprieties but does not accuse Magellan of wrongdoing, the Alberta Commission noted that Magellan managers improperly "transferred" about $6 million from Galleria Palms, a Magellan limited partnership that holds a Tempe apartment building, to other Magellan entities. The money was apparently later "transferred" back into the project.

Was this illegal commingling?

The Alberta Securities Commission says no.

Magellan "never intended to deceive or otherwise mislead the investors and never intended to jeopardize the project," the Alberta Securities Commission concluded.

The settlement agreement was too-little, too-late for investors who want their money back.

"Commissions don't get money back for investors," says Linder. "What we do is we say, 'You are a danger to the marketplace, therefore you are not allowed in the marketplace for a number of years.' . . . I know that is not very satisfactory for the investor who says, 'But they took my money.'

"The way our system works, and the way the American system works, is if you want your money, you go to court."

When asked to comment on the Alberta action, Resnick writes: "All matters have been resolved."

Alberta retiree Tom Esler believes much remains to be resolved.

He says he invested $23,000 in the Galleria Palms Limited Partnership. Three years later, Esler says he's gotten back only about $4,470.

Esler is livid. He contends Alberta authorities slapped Magellan on the wrist and washed their hands of the whole situation.

Alberta Commission spokesman Linder defends the agency's actions.

"You have the investors claiming black, you have Magellan claiming white," he says.

"All I can say is, what we looked at, we did not find what we would term as fraud . . . But Magellan is a huge entity, and we didn't look at every particular transaction. . . . In the matters we looked at in our investigation, the sanctions were more than adequate to deal with the situation we discovered."

"We barred these individuals from our marketplace for two years, and, presumably, investors in the future will take some heed of that."

But Magellan does not seem eager to get back into the business of raising money from small Canadian investors.

Investors like Ron Kuhn, for instance.

Kuhn, a British Columbia computer consultant, claims that three years ago he invested $30,000 in Magellan Traditions, a limited partnership set up to build and sell an apartment building in Mesa. Kuhn expected to reap a sizeable profit in two years. But three years later, Kuhn says he hasn't had a single cent of his original investment returned to him, and he's concerned that the partnership still doesn't hold title to the land. And like the Schroeders, Kuhn says he's received "very ambiguous" and "Clintonesque" updates from Magellan about the financial condition of the Mesa project. So Kuhn demanded explanations from Magellan, Magellan's accountant and regulators.

He says he got no satisfactory answers, so he concluded that it is not smart for Canadians to invest in an Arizona limited partnership.

"My opinion is that Magellan has exploited a jurisdictional nightmare," says Kuhn. "It is difficult for anyone in Canada to do anything in the United States or to access information about the projects. . . . I think Magellan is counting on this."

Disappointed with Canadian and American regulators, some Magellan investors took matters into their own hands.

In the mid-1990s, Canadians spent about $21 million to buy into Magellan's Real Estate Investment Trust, or REIT. The REIT contains 11 limited partnerships, each of which owns a separate real estate project. Five of the REIT properties are located in the Valley.

Although the properties are in the United States, the REIT is based in Vancouver. The actual trust document is recorded in Maryland.

In 1997, some REIT investors became angry when Magellan managers failed to provide audited financial statements that investors were entitled to. In addition, a lender wrote in an internal memo saying that Magellan managers had improperly "loaned" approximately $1.8 million from the REIT to other Magellan projects.

In 1998, some REIT investors organized a successful revolt.

They elected new trustees and weakened the power of Magellan trustees. Then they elected a new chairman, Ian Mallmann, a former vice president for Vantage Securities, which sold Magellan investments in the mid-1990s. The rebel trustees' first order of business was to commission a "forensic" audit by Pricewaterhouse Coopers.

That audit is the cornerstone of a fraud and racketeering lawsuit filed in August in Phoenix district court by the new REIT trustees. The suit names all Magellan companies and Losch, Litwin and Dewar personally.

In a nutshell, the REIT alleges that Magellan companies and Magellan principals raided the REIT's coffers for all sorts of improper expenses -- to fund other projects, to enrich themselves personally, to pay unrelated legal fees. Among other things, the REIT says Magellan honchos improperly lent $2 million of the REIT's funds in 1996 to one of their companies, then tried to hide it from the new trustees. According to the lawsuit, the loan still hasn't been paid back.

In her October 22 letter, Resnick says the lawsuit was filed in the wrong country and contends the allegations in the lawsuit are without merit.

Resnick says Magellan does not owe the REIT a penny; the REIT owes Magellan "in excess of $4 million." She adds that Magellan's efforts to sell REIT properties for the benefit of investors have been thwarted by Mallmann.

But in Vancouver, Magellan is taking the lawsuit seriously and has opted to fight the battle outside of the courtroom.

Magellan and several financial-planning firms who sold the REIT shares are attempting to call a meeting of REIT investors on November 4.

The reason, according to dissident investors: to use proxy votes to regain control of the REIT, dismiss the lawsuit in Phoenix and immediately sell all REIT properties. No more REIT, no more pesky REIT investors demanding forensic audits.

Dissident investors resist Magellan's proposed sale of the REIT; they say they don't trust Magellan with the proceeds.

But several financial-planning firms that sold Magellan's REIT investments in the first place, and who some investors say might be legally liable in the future because of their alleged lack of presale "due diligence," say in an October 21 press release that most REIT investors just want their money back.

Resnick referred New Times to two financial planners who back up Magellan's efforts to kick out Mallmann. One planner could not be reached for comment. The other is Michael Boni, who paid more than $6,000 in fines and signed an agreement with the British Columbia Securities Commission in May in which he admitted he violated securities regulations in 1997 in connection with selling an "oil-and-gas fund" stock to 16 clients.

Boni contends that the dissident trustees who have taken over the REIT are spending too much REIT money on themselves.

Magellan has long pointed out that Ian Mallmann, the dissident trustee currently running the REIT, voted to pay himself and two others a total of about $192,000 to run the REIT. Magellan also points out that Mallmann once officed for free for three months at Pricewaterhouse Coopers, which conducted the forensic audit that has fueled the fraud and racketeering lawsuit against Magellan.

Mallmann insists there was nothing improper about getting a free office from the auditors for three months, and notes that the compensation Magellan now claims is excessive was approved and voted on by Magellan principals when they were trustees of the REIT.

Laura Gahn, an investor who opposes Mallmann, summed up her frustration in an October 27 letter to Mallmann: "We need better accountability. Was that not one of the reasons you people were elected? To right the wrong that was already taking place with the other trustees?

"Would it be too much to ask to have the investors' interest put first and foremost before the dog fights?"

The Gahn letter was faxed to New Times by Magellan.

When New Times asked Magellan to respond to complaints of mismanagement and low returns on investment, publicist Resnick answered with a single question in her October 22 letter: "Which limited partners and properties are you referring to?"

In a follow-up letter on October 29, Resnick wrote: "For the most part, Magellan projects have performed close to or exceeded projections. In a few cases, some have performed below expectations. That's the nature of the business."

She noted that one Magellan limited partnership called "Longmore Estates" paid off handsomely -- investors recouped equity plus a whopping 22 percent annual return, she says.

But not all investments have been Longmores.

In 1997, a homeowners' association sued Magellan in Maricopa County Superior Court, alleging consumer fraud, breach of fiduciary duty and negligence in connection with Magellan's allegedly shoddy construction and poor management of Scottsdale Mission, a condo complex.

Magellan denied wrongdoing and said the case was baseless.

Magellan and the homeowners' association are reportedly nearing an out-of-court settlement.

In faraway Canada, limited partners wondered what to do.

The troubled property drew the attention of Brad Seutter and Dave Miller, two Alberta realtors.

The Canadian duo isn't granting interviews to newspapers, but letters they sent to investors make it clear they have a game plan: get enough limited partners to vote out Magellan as managers of certain properties, then assign management to Seutter and Miller. The next order of business: demand forensic audits.

Seutter and Miller organized the limited partners in Scottsdale Mission and fought a successful battle in Superior Court to remove Magellan as general partner of the project. Seutter and Miller then replaced Magellan as general partners of the Scottsdale apartment complex.

Seutter and Miller also organized Canadian investors to oust Magellan from Morada, a Magellan project in San Diego that has been in receivership for more than a year.

The duo claims it has the votes to wrest control of Canterra, a Phoenix apartment building.

They have their eyes on Palomar, a Magellan condo project in Sun City West that was taken over by a receiver and is now facing bankruptcy.

They are also trying to organize investors in three other Valley properties -- apartment buildings in Chandler, Scottsdale and Tempe.

Magellan's response to the Seutter-Miller attacks is to write investors seeking their loyalty while simultaneously poking holes in the Miller-Suetter takeover proposals.

Miller and Seutter bombard investors with letters contradicting the Magellan rebuttals.

And so it goes.

Gordon Grant, a computer specialist from Calgary, Alberta, says he invested about $100,000 during the mid-1990s in two Magellan properties that are being targeted by Miller and Seutter for takeovers.

Since Grant claims to have gotten only about $15,000 of his money back, he wholeheartedly supports the takeovers.

If investors don't organize and protect themselves, says Grant, no one will take care of them. Not the AG in Arizona. Not the regulators in Canada.

"There are no protections for investors whatsoever in the system," he says.

No protection, maybe, except for Zorro on the Internet.

"Here is my message to Big Business who takes advantage of the weak: It's time for you to play by the rules," Zorro writes.

"If you don't, you will force your victims into creating new websites . . . and YOUR name will be on it."

Contact Terry Greene Sterling at 602-229-8437 or at her online address: [email protected]