Southwest Exchange owner pleads guilty to wire fraud

By Mary Manning

Monday, June 8, 2009 | 6:16 p.m.

The man behind the collapse of Southwest Exchange Inc. pleaded guilty Monday to wire fraud for defrauding clients of $95 million.

Donald McGhan, 75, a current resident of Texas and owner of Southwest Exchange, Inc., entered his plea to four counts of wire fraud before U.S. District Judge Philip M. Pro and agreed to serve eight to 10 years in federal prison.

Judge Pro set sentencing for Sept. 17.

At the height of its business, Southwest Exchange held nearly $95 million for about 125 clients looking to reinvest profits from the sale of real estate, U.S. Attorney Greg Brower of Nevada said. The clients, under an IRS-sanctioned practice, were able to delay paying taxes on the cash deposited with the company as long as the money was withdrawn within a certain time period to buy new property.

McGhan bought Southwest Exchange on about June 28, 2004 to use client money held in trust to buy businesses, including a breast implant manufacturing business.

At the time, Southwest Exchange held about $109 million in trust. Within two weeks of McGhan purchasing the company, he transferred more than $40 million from Southwest Exchange's investment account at Smith Barney to McGhan-affiliated entities disguised as loans to allow McGhan to purchase a French breast implant manufacturer, Eurosilicone.

McGhan continued to loan money from Southwest Exchange to his entities, withholding information from potential clients that he had been lending the company's investment monies to in order to buy Eurosilicone and other companies.

From at least August 2006 to January 2007 McGham continued to seek Southwest Exchange customers under the false premise that the company was financially secure and stable.

Federal prosecutors estimated that 125 victims, most from Nevada, lost more than $95 million in investments placed with Southwest Exchange. McGhan has agreed to return the full amount of their investments as determined by the court. That restitution may not be discharged by any current or future bankruptcy filing by McGhan.