The president and the general counsel of an Idaho corporation recently pleaded not guilty to charges of conspiracy to commit securities fraud, wire fraud, mail fraud and bank fraud. Douglas Swenson was the president of DBSI Housing, Inc. and Mark Ellison was the general counsel of the DBSI-related companies. Two other employees were also indicted. So, will this indictment survive even if there are no individualized allegations against any of the defendants?
DBSI was founded in 1979 and is headquartered in Meridian, Idaho, the third largest city in the state with just over 75,000 people. (To put that in perspective, the third largest city in California is San Jose with over 945,000 people.) DBSI is a conglomerate of many companies, only a few of which are relevant to the indictment. DBSI was “engaged in the acquisition, development, management and sale of commercial real estate properties throughout the United States.”
Relevant here, DBSI sold certain investments products called “Tenant-in-Common 1031 exchange interests” or “TIC investments.” Lucky for you (and me), we do not need to recall what a tenant in common is to understand what supposedly happened here. DBSI ultimately stopped selling the TIC investments in October 2007 after the SEC investigated them.
The Alleged Scheme
The indictment alleges the following scheme: DBSI would buy a property subject to a mortgage. The TIC investors would pay DBSI 20-30% more than what DBSI had paid. DBSI would sell to investors subject to a “Master Lease.” The investors would lease the property back to DBSI for a period of 10 to 20 years and DBSI would operate and manage the property during that period, as well as service the debt. TIC investors would then get a set return each month, usually 6.5%. The plan was that DBSI would make more from the rents paid by the underlying tenants of the property than it would pay out to TIC investors.
This may all be above board, but the supposed illegality arose from statements DBSI made to investors in the private placement memoranda (PPM). The PPMs represented that DBSI was capitalized with $15.4 million, that DBSI could cover all payments to investors for two years even if the underlying tenants paid DBSI nothing and that the companies were worth $105 million. According to the indictment, these claims were not true, and DBSI ended up using new investors’ contributions to pay promised returns to existing investors.
Seriously, is there any investment scheme out there that does not unravel because the people in charge end up using new investors’ money to pay existing investors? Have these guys not heard of Bernie Madoff?
The government also alleged that DBSI made other misrepresentations. For example, DBSI allegedly misrepresented to investors that their funds would not be commingled with the funds of any other investor or entity. Yet DBSI supposedly “regularly commingled” the funds. And DBSI told investors that it had $235 million in “fully collectible” reserves from loans to technology start-ups, when, in fact, it had never received any payments on that debt.
Where Is the Intent?
The interesting part of the indictment is what is missing: any allegations specific to the individual defendants. For example, there are no incriminating memos or emails quoted saying who knew what and when he knew it. It does not even allege that the names or signatures of one or more of the defendants are on the PPMs containing the majority of the misrepresentations or allege that any of them drafted or approved the PPMs. Instead, the four defendants are lumped together in every allegation, with no specific wrongful acts attributed to any one of them. Such allegations may support indicting a company but it is hard to see how they support the indictment of individuals. In fact, crafting the indictment this way suggests that the USAO is simply looking for one of the four defendants to plead guilty and cooperate, so they can build a case against the others.
Current Case Status
The defendants have all pleaded not guilty, and the case is in its early stages. Given the relatively large numbers at stake, there can be little question that this is a major case for the Idaho USAO and it will be prosecuted vigorously. In fact, the one filing of substance is a motion to prevent the government from seizing Mr. Swenson’s assets from TD Ameritrade before trial, arguing that the government never made a showing that a straightforward restraining order to TD Ameritrade would do the trick instead.