Securities Fraud Lawsuit Seeks to Recover $49M From 96 Independent Broker-Dealers Liable Over Sales of Tenant-In-Common Exchanges

The trustee for the DBSI Inc. bankruptcy is suing 96 independent broker-dealers for securities fraud related to suspect tenant-in-common exchanges that were sold to investors. James Zazzali is seeking about $49 million in commissions earned.

In his securities fraud complaint, Zazzali, who is a retired Supreme Court of New Jersey justice, claims that DBSI’s TIC deals were part of a $600 million Ponzi scam. The lawsuit contends that the following companies made the most commissions from selling DBSI:

• Berthel Fisher & Company Financial Services Inc.
• QA3 Financial Corp.
• DeWaay Financial Network LLC,
• The Private Consulting Group • Questar Capital Corp.

22 of the broker-dealers named as defendants are no longer in business. Zazzali contends that the commissions were fraudulent transfers by DBSI and that due to the Ponzi nature of the enterprise, old investors benefited from funds put in by new investors. The trustee believes that the broker-dealers should return investor payments and commissions, which should be distributed to DBSI creditors.

The Securities and Exchange Commission has not filed securities fraud charges against DBSI. Other private placement issuers, such as Provident Royalties and Medical Capital Holdings, were charged by the regulator last year. Provident Royalties’ receiver sued over 40 broker-dealers this year in an effort to obtain claw-back in principal and commissions from firms that sold private placements.

TICs are a form of real estate ownership involving two or more parties with fractional interests in a property. DBSI Inc. was one of the biggest distributors and creators of the product until it defaulted on investor payments and filed for Chapter 11 bankruptcy protection in November 2008. Before then, independent broker-dealers actively sold DBSI TICs. The financial product grew in popularity in 2002 after the Internal Revenue Service issued a ruling that let investors defer capital gains on commercial real estate transaction involving property exchanges.

Related Web Resources:
Sour real estate deals land B-Ds in hot water, Investment News, December 12, 2010
Something in common: Firms that sold TICs from DBSI, Investment News, December 15, 2010
Iowa brokerages included in lawsuit, DesMoines Register, December 14, 2010
Institutional Investors Securities Blog

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