Auction-Rate Securities Were LandAmerica’s Undoing
Investments in illiquid auction-rate securities proved to be a financial nightmare for LandAmerica Financial Group and for customers who are now scrambling to recover money in what was supposed to be a short-term and low-risk arrangement. On Nov. 26, less than a week after the Virginia-based company’s proposed merger with rival Fidelity National Financial abruptly fell through, LandAmerica filed for Chapter 11 bankruptcy protection.
On Dec. 23, Fidelity National Financial acquired LandAmerica Financial Group’s two principal title insurance underwriters, Commonwealth Land Title Insurance Company and Lawyers Title Insurance, as well as United Capital Title Insurance Company. The total price tag of the deal: $235 million. The purchase makes Fidelity National Financial the largest title insurer in the United States.
The undoing of LandAmerica and its 1031 Exchange Services subsidiary, which also was placed in Chapter 11 bankruptcy protection, involved risky bets on auction-rate securities. In its bankruptcy filing, LandAmerica said a slowdown in the real-estate title insurance business and the collapse of the auction-rate securities market made it impossible to meet the ARS obligations of its 1031 Exchange Services customers.
A 1031 exchange, which refers to a section of the U.S. tax code, allows investors to delay capital-gains taxes on the proceeds from recently sold property. The catch is they must allow a third party to hold the funds.
In LandAmerica’s case, that arrangement proved disastrous. Its 1031 customers - which include many retirees - are now left holding an empty bag. After investing customers’ money in illiquid auction-rate securities, LandAmerica’s best advice is for them to file a claim. This is after the company had marketed LandAmerica 1031 Exchange Services as “providing the security and liquidity that taxpayers and their advisors should be demanding from a qualified intermediary.”
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