Superstar adviser DeWaay in 'survival mode,' says forensic accountant

Ex-brokerage boss agrees to $3M settlement with investors, but questions raised about his ability to cover the tab

Apr 16, 2013 @ 2:21 pm

By Bruce Kelly

It continues to go from bad to worse for former superstar adviser Don DeWaay, who lost his broker-dealer in November because of the costly fallout of investor lawsuits stemming from sales of high-risk private placements.

According to a court filing dated today outlining a $3 million settlement with investors, “Mr. DeWaay is presently in survival mode.”

Mr. DeWaay's assets are currently valued at $1.9 million, according to the settlement, which was filed in Iowa District Court for Decatur County. Those assets include Mr. DeWaay's other businesses and real estate he owns.

However, according to a forensic accountant, “This number is probably optimistic at best,” Judge John D. Lloyd said in the settlement. “Whether or to what extent there is any going concern value [in Mr. DeWaay's businesses] appears questionable,” Mr. Lloyd wrote. “The real estate which he owns may or may not sell and may or may not be worth what it is valued at.”

Mr. DeWaay said he was glad to have reached a settlement, which he said was “handled in the most equitable way possible. It's a humbling experience I never want to repeat.”

When asked if he was in “survival mode,” Mr. DeWaay said: “We've got loyal clients, and we're pleased they are sticking with us. We're excited about the future and to move forward.”

If it is not successfully appealed, the ruling ends a financial threat that could have pushed Mr. DeWaay into bankruptcy court.

At one time, Mr. DeWaay produced between $8 million and $10 million annually in fees and commissions. His registered investment adviser, DeWaay Capital Management, has $202 million in client assets, according to the firm's form ADV.

“Certification of a class action in these cases is the only effective means of adjudicating a large number of claims against these defendants and the only practical way that many small investors will have to assert a claim at all,” according to Mr. Lloyd.

The structure of the settlement is unusual because it requires investors who had individual arbitration claims against Mr. DeWaay or his broker-dealer to become part of a non-opt-out, limited fund class action settlement. Mr. DeWaay was facing a slew of such claims, as well as two class action claims regarding due diligence applied to private placements, including failed real estate promoter DBSI Inc. In total, he faced claims of $30 million.

The settlement, however, consists of only $3 million. Scottsdale Insurance Co. is contributing $2 million, and Torus Specialty Insurance Co. is contributing $75,000, according to the court filings. Mr. DeWaay and his related companies will contribute $925,000 and also pay $130,000 toward the cost of litigation.

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