This makes no sense.

No, $7,000 was not the possible max contribution in 2011.

Anything gained or lost inside of an IRA is not reported on a 1099-R.

Even if the account went to 0, you don't report that on a 1099-R. It just means that when/if distributions are taken, there is nothing in the account, and the tax forms where you enter the amount is filled in accordingly. For instance, you cannot take an RMD from a account that went to $0, obviously.

And you cannot invest in certain types of activities. If this was a self-directed IRA, then the client took that leap of faith, not the "IRA Company."

I would find someone to consult with, to see if the "IRA Company" was fraudulent and all of this was fraudulent from the beginning, and determine if there is criminal activity here.