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Local Business

Another financial scam, another cautionary tale

By From page B7 | April 27, 2014

Yet another financial scam has finally run its course with very bad results.

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.

Investors lost millions in phony private placement that turned out to be a Ponzi scheme. One of the attorneys involved observed correctly that this event is just another warning sign for investors to stay away from such deals.

The trial lasted 42 days and showed that though the real estate investments were “universally unprofitable” yet DBSI “cooked the books” to portray themselves as a thriving company with a net worth of $105 million.

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.

They also had regular real estate investment deals going back into the 1990s where they siphoned off money for their personal benefit and then had the limited partnership declare bankruptcy.

The list of injured investors is large, including some broker-dealers who sold the products. But DBSI was not alone. The firm was one of the big three syndicators of phony private placements that decimated independent broker-dealers over the past decade.

Though the DBSI executives deserve to be convicted and they deserve to go to jail for a long time, the investors are still damaged. The conviction does not result in the return of the money to those people who invested in these products. In fact, the pain is not yet over for the investors because some of the defunct partnership investments are still in the midst of the bankruptcy legal morass.

Recall what happened with the Madoff fraud. Anyone who received money thinking it was distribution from the investment may have suffered a “claw back” of the money. The legal premise is that creditors have valid claims and should receive their money before the investors do. So the bankruptcy trustee has authority to demand back money received by the investors even though they were innocent victims also. Truly this is adding insult to injury.

The demise of DBSI and the conviction of its leaders is another cautionary tale about this area of the financial markets. This episode is just another reason why investors should be skeptical about the more exotic and complex investment structures. The track record of private placements, most hedge funds and numerous “special” alternative investments is horrible.

In today’s security markets where you can find almost any kind of investment idea in a liquid, easily tradable form, these special products without liquidity are highly questionable. Frankly, they simply play to greed.

This does not mean that every such deal is bad. The legal form is not at fault, but it depends heavily on the management. The old phrase, “It’s the owner, not the dog,” certainly applies. The investment vehicle can be used for good or for bad reasons.

I would comment that everyone should be skeptical of investment deals with the following characteristics: There is a complicated legal structure requiring a veritable book to explain the offering; the promised results seem too good to be true; it is a black box and the details cannot be divulged because that would jeopardize their special situation.

Mark Sievers, president of Epsilon Financial Group, is a certified financial planner with a master’s in business administration from the University of California, Berkeley. Contact him at [email protected]

Mark Sievers


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