Officers at Big Three private placement shop indicted

Four executives at DBSI charged with, among other things, securities fraud

Apr 11, 2013 @ 3:24 pm

By Bruce Kelly

fraud, private placements, grand jury, securities, ponzi scheme
+ Zoom

Four top executives of DBSI Inc., one of the Big Three syndicators of phony private placements that decimated independent broker-dealers in the last decade, were indicted Wednesday by a federal grand jury in Idaho on 83 charges, including conspiracy to commit securities fraud, wire fraud, mail fraud and interstate transportation of stolen property.

DBSI was acting like a Ponzi scheme, relying on new investor funds, including investor money that the company said would be used only in particular circumstances, to continue operations and pay returns to other investors, according to the indictment.

The indictment seeks forfeiture of properties and assets totaling $169 million.

The principals charged include Douglas Swenson, 64, co-founder and former president of DBSI; Mark Ellison, 64, co-founder and general counsel; and two sons of Mr. Swenson — David, 35, and Jeremy, 40, who were assistant secretaries.

DBSI raised money primarily through two avenues: By allegedly defrauding investors of $89 million with sales of high yield notes in 2008; and sales of securities known as “tenant-in-common,” 1031 exchanges known as TICs.

The executives represented DBSI as having a net worth of $105 million when the company was bleeding cash, according to the indictment. Two of its biggest losers were $235 million in loans from 1999 to 2008 to technology startups that were never repaid, and its TIC program, which was losing $3 million per month.

Attorneys for the four executives were not available for comment.

Along with Medical Capital Holdings Inc. and Provident Royalties LLC, DBSI raised hundreds of millions of dollars through small to midsize independent broker-dealers. Armed with due-diligence reports paid for by DBSI, MedCap and Provident, the broker-dealers raised close to $3.5 billion in capital for the three private-placement syndicators. Each of the firms promised high yields just as investors began a frantic search for yield in 2006, 2007 and 2008.

The results were disastrous. DBSI, which sold a variety of real-estate-linked investments and private notes, declared bankruptcy in 2008. MedCap and Provident shut down in 2009 after the Securities and Exchange Commission charged both with securities fraud. Crushed by the cost of defending investors' arbitration complaints, many of the broker-dealers that sold DBSI, MedCap and Provident products have shut down. Investors lost hundreds of millions of dollars.

The indictment, handed down Wednesday by a federal grand jury in Boise, came one day after federal prosecutors reached a plea agreement with Gary Bringhurst, DBSI's former chief operating officer.

Mr. Bringhurst, 46, agreed to plead guilty to one count of conspiracy to commit securities fraud for falsifying financial statements used to artificially bolster the company's financial standing and mislead investors about how their money would be used, according to court documents.

From January 2007 to November 2008, the four DBSI executives consistently misrepresented the company's financial health, asserting that it was profitable and had a net worth of $105 million. To the contrary, the four men knew that DBSI's real estate and non-real-estate businesses were universally unprofitable, and its highly touted Master Lease investment product was losing almost $3 million per month, according to the indictment.

Executives from MedCap and Provident also recently have been prosecuted.

Former Medical Capital president Joseph J. Lampariello last May pleaded guilty to wire fraud, while Paul Melbye, co-founder and former chief executive of Provident Royalties, in November pleaded guilty to conspiring to defraud investors of $485 million in an oil and gas scheme.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Jun 27

Webcast

Emerging Market Debt: 5 Forces at Work

When it comes to emerging market debt, there are a series of forces that help you drive better results for your clients. In today's continually changing market environment, it is critical to know the forces at play to help keep your investment... Learn more

Accepted for 1 CE Credit from the CFP Board. Approved by IMCA for 1 CIMA®/CIMC®/CPWA® CE credit. Approved for 1 CFA Credit.

Featured video

Events

Pershing's Crowley: The case for business transformation

Your practice is changing rapidly. What worked five years ago might not work for the next five years. Pershing's Jim Crowley has some solutions as your business evolves.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print