Since the credit crisis, the financial advice industry has been littered with the dead shells of independent broker-dealers that sold fraudulent private placements before the crash.
DeWaay Financial Network Inc., GunnAllen Financial Inc., QA3 Financial Corp. and dozens of others all ran short of capital in the wake of a cascade of investor litigation, stemming from the sale of the phony or suspect deals.
Indeed, 43 of the 92 broker-dealers that sold tenant-in-common exchanges – real estate deals known as TICs – sponsored by the defunct DBSI Inc. are no longer in business, according to an
InvestmentNews analysis.
A staggering amount, 47%, of broker-dealers that sold DBSI TICs have been closed or merged.
But Berthel Fisher & Co. Financial Services Inc., one of the biggest sellers of DBSI TICs, appears to be out of the woods.
Berthel Fisher last year settled a potentially devastating lawsuit brought by the DBSI Private Action Trust, according to the firm's annual Focus report, which was made available on the Securities and Exchange Commission's website in the past week.
That trustee in 2010 sued Berthel Fisher and almost 100 other broker-dealers that sold DBSI TICs, seeking to claw back about $49 million in commissions from the broker-dealers.
About 300 of the firm's clients “assigned their claims to the trustee totaling $31.4 million," according to Berthel Fisher's Focus report.
Last September, the adversary proceeding brought by the DBSI Bankruptcy Trustee was settled.
The settlement amount wasn't disclosed.
Berthel Fisher generated $5.6 million in commissions from DBSI sales, putting it at the top of the list of firms that sold the products, according to court documents.
DBSI was one of the biggest creators and distributors of TICs until it defaulted on payments to investors and filed for bankruptcy protection under Chapter 11 in November 2008. TICs gained popularity after a favorable
Internal Revenue Service ruling in 2002 that allowed investors to defer capital gains on commercial real estate transactions involving the exchange of properties.
The clawback complaint filed by the trustee for the DBSI bankruptcy, James Zazzali, alleged that the TIC deals from DBSI were actually a $600 million Ponzi scheme.
“At some point in or after 2004, the DBSI enterprise took on the characteristics of a Ponzi scheme, in which the guaranteed returns of the old investors could only be satisfied by the flow of funds from the new investors,” according to the complaint, which was filed in November 2010 in U.S. Bankruptcy Court in Delaware.
Last April, four top executives of DBSI were indicted 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. The case against the executives is pending.
Based in Marion, Iowa, Berthel Fisher has about 320 affiliated registered representatives and generated $64.3 million in revenue last year.
It posted a loss last year of $763,000, according to its Focus report.
Because of the tangle of DBSI litigation, Berthel Fisher for the past few years had been on a death watch.
But the company's outside counsel thinks that the firm has turned the corner.
“I think [Berthel Fisher] is out of the woods,” said the attorney, Vincent Louwagie.
“A lot of firms had difficulty after the 2008 and 2009 crisis. The strongest have survived, and I think Berthel Fisher is one of those," Mr. Louwagie said.
“My hat's off to them in being able to survive,” said Jonathan Henschen, an industry recruiter. “Surviving the onslaught of litigation from the fraudulent private placements is an achievement in itself.”
Thomas Berthel, the firm's founder and chief executive, wasn't available to comment.
In 2012, Berthel Fisher made changes to the amount of alternative investments its reps and financial advisers could sell, Mr. Louwagie said.
“Even though they're in the clear, the next hurdle will be the reps not getting upset over any restrictions on alternative investments. They could flee to other broker-dealers who don't have those restrictions," Mr. Henschen said.
“Yes, [Berthel Fisher] has become more restrictive with alternatives and is in line with industry standards,” Mr. Louwagie said.
The firm, however, hasn't put a hard cap on the amount of alternative investments an adviser can sell clients because the limitations vary, he said.
