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

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

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Ric Edelman: 3 factors transforming the financial advisory industry

We are at the "knee in the curve" of a transformation of the financial advice industry, according to Ric Edelman. But what's next and how will it shape your practice of the future?

Video Spotlight

Help Clients Be Prepared, Not Surprised

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

Brace for steepest rate hikes since 2006 in new year

Citigroup, JPMorgan Chase predict average interest rates across advanced economies will climb to at least 1 percent in 2018.

Why private equity wants a piece of the RIA market

Several factors, including consolidation in the independent advice industry and PE's own growing mountain of cash, are fueling the zeal to invest.

Finra bars former UBS rep for private securities transactions

Regulator says Kenneth Tyrrell engaged in undisclosed trades worth $13 million.

Stripped of fat commissions, nontraded REIT sales tank

The "income, diversify and interest rate" pitch was never the main draw for brokers.

Morgan Stanley fires former Congressman Harold Ford for misconduct

Allegations against the wirehouse's former managing director include sexual harassment, which Ford denies.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print