Four top executives of DBSI Inc., one of the leading syndicators of private-placement investments, were convicted by a federal jury in Boise, Idaho, earlier this week on multiple counts of fraud — an outcome that one securities lawyer said is another warning sign for investors to stay away from such deals.
The principals convicted on Monday were Douglas Swenson, 65, co-founder and former president of DBSI; Mark Ellison, 65, DBSI co-founder and general counsel; and two of Mr. Swenson's sons — David, 36, and Jeremy, 41.
Douglas Swenson was found guilty of 34 counts of wire fraud and 44 counts of securities fraud. Mr. Ellison, David Swenson and Jeremy Swenson were convicted on 44 counts of securities fraud. The jury found Mr. Ellison and the Swenson sons not guilty on 34 wire fraud counts and two conspiracy counts.
During the trial, which lasted 42 days, the government said that the defendants represented DBSI as a thriving company with a net worth of $105 million. Yet its real estate and other business activities were “universally unprofitable,” according to a statement from the office of U.S. Attorney Wendy J. Olson. The indictment sought forfeiture of properties and assets totaling $169 million.
A sentencing date has not yet been set.
DBSI acted like a Ponzi scheme, relying on new investor funds to continue operations and pay returns to other investors. It raised money primarily by defrauding investors of $89 million with sales of high-yield notes in 2008 and sales of securities known as “tenant-in-common” 1031 exchanges.
The firms was one of the big three syndicators of phony private placements that decimated independent broker-dealers over the past decade.
Andrew Stoltmann, owner of an eponymous securities law firm, represented 30 people who filed Finra arbitration claims against brokerage firms that sold DBSI investments.
“These guys deserved to be convicted, and they deserve to go to jail for a very long time,” Mr. Stoltmann said. “It's a little bit of a hollow victory because it doesn't lead to the return of the money that people invested in these products.”
The demise of DBSI and the conviction of its leaders is another cautionary tale about this area of the financial markets, Mr. Stoltmann said.
“It's reason number 813 why investors shouldn't touch most private placements,” he said. “The track record of private placements is horrific. You have these bad actors who flock to private-placement deals like a moth to a flame.”
But the DBSI example shouldn't taint the entire private-placement market, according to Peter Kalmus, president of Concierge Capital. He said that unregistered securities have been profitable for his clients, providing increased risk-adjusted returns and diversification. Problems arise when there is poor underwriting, financing, market conditions or management.
Mr. Kalmus did not defend DBSI. In fact, he refused to sell their products because of qualms about the DBSI balance sheet and valuation process. He made an analogy to his Rottweiler, which he said is “kinder and gentler than any Golden Retriever.”
“It’s the owner, not the dog,” Mr. Kalmus said. “It’s the same thing with private placements. The vehicle can be used for good or for bad reasons.”