DeWaay Financial Network LLC, one of several broker-dealers being sued by the trustee for DBSI Inc.'s private-actions
trust, may pay the ultimate price for selling the real estate firm's deals.
Last month, claiming that bankruptcy looms, DeWaay asked a federal judge in Delaware for a temporary injunction to halt eight arbitration claims that investors have filed with the
Financial Industry Regulatory Authority Inc. stemming from their losses in DBSI securities.
Selling through dozens of independent broker-dealers, DBSI raised $1 billion from investors and declared bankruptcy in 2008.
The DeWaay memorandum raising the specter of bankruptcy was one of several filings in a case that began in July when the DBSI trustee, James Zazzali, sued DeWaay and five other broker-dealers that sold DBSI deals.
Executives with other broker-dealers named in the lawsuit were quick to note that they aren't facing the same financial difficulties as DeWaay Financial Network.
“We have no intention of going down that path,” said Joe Miller, chief executive of Independent Financial Group LLC, who said his firm is in confidential settlement negotiations with Mr. Zazzali.
A resolution should be coming in short order, he said.
Likewise, G.A. Repple & Co. is in settlement discussions with Mr. Zazzali, and those discussions “look very encouraging,” said Glenn Repple, the firm's chief executive. “We hope to wrap it up by the end of the year.”
Girard Securities Inc. “has minimal exposure and doesn't have much liability” stemming from DBSI, said Houston Goddard, the firm's general counsel and chief compliance officer.
J.P. Turner Co. LLC and Berthel Fisher & Co. Financial Services Inc. are also named in the DBSI trustee's lawsuit.
Heidi Wheatley, a J.P. Turner spokeswoman, said that the firm doesn't comment about continuing litigation.
Tom Berthel, chief executive of Berthel Fisher, wasn't available to comment, said firm spokeswoman Shelli Brady.
DeWaay Financial Network is in a different position.
The firm “lacks sufficient funds to satisfy the claims in eight arbitration claims pending against it — let alone the potential claims of 304 other customers that have not yet brought suit. The threat posed by these mounting costs and the attendant potential for liability hangs over the defendant's limited funds like the Sword of Damocles,” according to the firm's memo, which was filed in U.S. District Court in Delaware.
“Absent injunctive relief, that sword's descent is imminent and in all likelihood would force the defendant to declare bankruptcy,” according to the memo.
Failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC have forced dozens of broker-dealers to close, be sold or seek bankruptcy protection.
Now broker-dealers could be facing the the same result for selling DBSI securities.
The Des Moines Register first reported DeWaay Financial Network's predicament last week.
The company's request for an injunction is part of its strategy to come to a settlement with investors, president Matt Stahr said.
“We still feel like we're in the right,” he said, contending that the firm did its due diligence on the DBSI products. However, the costs of defending the firm in individual arbitration claims are prohibitive, he said.
The firm has made substantial progress toward reaching a settlement but hasn't had a hearing yet regarding its request for an injunction, Mr. Stahr said.
According to court filings, the eight DeWaay Financial Network clients suing the firm in Finra arbitration bought $2.9 million in DBSI securities. DeWaay Financial Network so far has spent $46,000 defending those claims and expects to spend another $1.1 million in defense costs.
Beyond those investors, DeWaay Financial Network sold DBSI securities to an additional 304 clients, and the firm's total exposure exceeds $24 million.
Email Bruce Kelly at [email protected]
