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By JOHN MILLER
Associated Press Writer
DBSI probe: New investors paid earlier obligations237 days ago
(AP:BOISE, Idaho) Court-appointed investigators have unearthed evidence in the federal bankruptcy case of failed real estate company DBSI Inc., that money from new investors was used to pay financial obligations to those who had previously bought into the company.
The state of Idaho has alleged in a separate state 4th District Court lawsuit that DBSI engaged in a fraudulent "Ponzi scheme." Lawyers working for the Idaho Department of Finance said the preliminary review by investigators appears to confirm those allegations.
DBSI, based in the Boise suburb of Meridian and incorporated in Delaware, has more than 8,000 investors across the United States, and many stand to lose hundreds of thousands of dollars.
"At least as early as 2006, DBSI was being kept afloat by new investor money so they could pay older obligations," David Baldwin, whose Delaware law firm was hired by the Idaho Department of Finance to represent the state's interests in the case, said Tuesday.
Baldwin's firm monitored a bankruptcy court hearing last week in Wilmington, Del., where lawyers representing the court-appointed investigators detailed their findings so far.
DBSI and about 180 of its nearly 800 associated companies filed for reorganization in a Chapter 11 bankruptcy petition in Delaware in November.
The 29-year-old company became one of the nation's biggest dealers of fractional ownership interests in hundreds of commercial properties across the United States. The investments became popular after a 2000 Internal Revenue Service ruling allowed people to reinvest proceeds from previous real estate sales in so-called "tenant-in-common" schemes like those offered by DBSI to defer paying capital gains taxes.
After DBSI failed, however, Idaho demanded the bankruptcy court appoint a team of lawyers and forensic accountants to scrutinize accounting records kept by the company's majority owner, Douglas Swenson.
Joshua Hochberg, the lead investigator, didn't immediately return a phone call from The Associated Press seeking comment.
Hochberg is a former U.S. Justice Department lawyer who is now a private Washington, D.C.-based lawyer. He has pledged to provide an interim report to U.S. Bankruptcy Court Judge Peter Walsh by July 28, Baldwin said.
Steve McNeill, a lawyer with Baldwin's firm who listened to the investigator's presentation, said Hochberg didn't say outright that fraud had occurred, but suggested there were significant irregularities in how DBSI was run that merit additional scrutiny.
For instance, many of DBSI's financial records were in disarray, Hochberg found.
Also, transactions within the company, including transfers among DBSI entities, Swenson and four other minority owners, were more numerous that previously thought.
What's more, Hochberg apparently discovered a database that unsecured creditors in the case had been previously unaware of.
"It could be nothing, it could be a smoking gun," McNeill said of the database. "The report that he (Hochberg) provided to the court was very objective: It said, 'This is what we found so far. It's too early to draw any real conclusions.' "
Outraged DBSI investors have sent dozens of letters to the bankruptcy court imploring action, including June 6 correspondence from a California couple demanding Judge Walsh "hold DBSI's feet to the fire."
"My wife and I have had our incomes slashed, seen the value of our assets stripped away, been extorted by lenders and been forced to pay DBSI's bankruptcy attorneys, among other indignities, and we the investors are the victims in all this," wrote Eric and Nicole Nessa, of Mission Viejo, in a letter obtained by the AP.
Last week, DBSI's unsecured creditors filed a motion in Walsh's court demanding they be allowed to submit a competing Chapter 11 reorganization plan, largely because DBSI has excluded more than 600 of its entities from the Chapter 11 proceedings _ preventing them from being made available as part of efforts to recoup creditors' losses.
"An entire universe of DBSI entities with untold assets have been obscured," creditors wrote. "The debtors are not honoring their fiduciary duties to maximize value for the estates ... Instead, the debtors are plainly acting to further the conflicted self-interests of others."
Doug Swenson's phone number in Boise has been disconnected. A phone call to DBSI lawyer Tom Banducci in Boise wasn't returned. Banducci has previously said Swenson did nothing wrong.
Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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