Straits of Magellan

Page 4 of 5

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.

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Terry Greene Sterling