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Regulators Accuse DBSI of Securities Fraud

Posted by: Jeffrey B. Kaplan
August 18, 2009
Topic: DBSI Securities Fraud

Idaho securities regulators and an arm of the U. S. Justice Department have accused Delaware corporation DBSI of securities fraud, including running a Ponzi scheme and selling unregistered securities. "It appears that certain of [DBSI's] officers and directors, including (President) Douglas Swenson, have engaged in misconduct, fraud and mismanagement which collectively caused damage to [DBSI's] investors and creditors," a U.S. authority said. Investors who bought DBSI investments upon the recommendation of a broker or brokerage firm may be able to recover their investment losses through individual Financial Industry Regulatory Authority (FINRA) securities arbitration claims against the brokerage firms that sold the investments.

DBSI sold tenants in common investments ("TICs"). The TICs allowed investors to purchase fractional interests in commercial buildings and receive monthly payments from tenants' rent. But according to recently filed lawsuits, DBSI also bought land that sat undeveloped following the economic downturn. Because all cash reserves were pooled into one fund, proceeds from DBSI's high-earning commercial properties and new sales were used to pay investment returns to investors in low-earning, or non-performing investments. DBSI ultimately ran out of money when it stopped making sales. Investors were left with no monthly checks and DBSI filed for bankruptcy. This left thousands of investors with millions of dollars in losses.

Part of the problem was that DBSI guaranteed high monthly payments to its investors. But DBSI did not generate enough income to cover its obligations. So investors stopped receiving their "guaranteed" monthly payments.

After reviewing DBSI's internal records, a court-appointed examiner issued a report that noted that:

•     DBSI had "serious cash flow problems and operating losses" when it sought investors in  a 2008 notes offering;

• most of the $90 million in proceeds (i.e., investors' money) from the 2008 offering were not "invested" in ways that DBSI had promised; and

• the proceeds "were actually used to meet then-current cash needs," and "As a result, investments were not made that could one day be used to repay the 2008 notes."

Some of DBSI's cash-flow needs that apparently were met with the proceeds from the 2008 offering were paying investment returns to earlier investors. In other words, new investors' money was used to pay prior investors' "guaranteed" investment returns. This is a classic example of a Ponzi scheme. According to regulators, the use of newer investors' money to pay investment returns to prior investors appears to date back to at least 2006.

Unfortunately, brokers and brokerage firms sold DBSI-related investments as safe and offering guaranteed returns of between 7 to 12 percent per year. Dimond Kaplan & Rothstein, P.A. believes that these brokerage firms failed to disclose the true nature and risks of the DBSI investments, including that DBSI was or may have been a Ponzi scheme. Under federal and state laws, all risks and material information must be disclosed to investors.

Dimond Kaplan & Rothstein, P.A. [www.dkrpa.com] currently represents DBSI investors. The firm will continue to file FINRA securities arbitration claims against brokerage firms that sold the investments in an effort to recover clients' investment losses. The firm believes that the brokerage firms failed to perform adequate due diligence before recommending and selling the DBSI investments. DKR also believes that the brokerage firms that sold the investments misrepresented the nature and risks of the investments.

Dimond Kaplan & Rothstein, P.A. is an AV-rated, nationally recognized law firm with extensive experience representing investors throughout the United States and Latin America in investment fraud and stockbroker and brokerage firm negligence cases. If you lost money in DBSI investments, please contact attorney Jeffrey B. Kaplan of Dimond Kaplan & Rothstein, P.A. at (888) 578-6255 or jkaplan@dkrpa.com for a free case evaluation. You also may visit the firm on the web at [www.dkrpa.com] or [www.investmentfraud-lawyer.com].


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