As investment scandals from Bernie Madoff to Stanford Financial Group shake the national financial market, Flathead investors have been burned by their own set of scammers.
Last week, a federal bankruptcy judge agreed to appoint an independent financial examiner to look into a securities case involving DBSI, a Boise, Idaho-based investment firm. Eighty Montanans have a combined $32 million invested with the company, including six individuals from the Flathead area with about $1.5 million invested.
In fact, the overall number of securities and fraud cases affecting Montanans has increased significantly.
“The monetary losses are up about 1,000 percent from last year,” Jessica Rhoades, communications director and policy advisor for the Montana State Auditor’s Office, said. “It’s really unprecedented.”
DBSI and 140 of its affiliates nationwide filed for Chapter 11 bankruptcy protection in November, leaving the holdings of investors across the country in doubt.
DBSI specialized in tenant-in-common, or TIC, real estate transactions, where an investor is allowed to hold a fractional interest in a property. TIC investors, as a group, paid DBSI a premium above a building’s acquisition price. In return, DBSI managed and subleased the buildings and guaranteed the TIC investors a minimum annual return.
The system worked well in recent years where DBSI acquired more than $2 billion in property, but when the economy soured DBSI couldn’t keep its buildings leased or raise capital to buy new buildings. As a result, it was unable to pay off its earlier investors.
DBSI is facing regulatory and civil lawsuits alleging it engaged in securities, banking and tax fraud and racketeering. A class-action suit filed by investors also alleges DBSI and its principals were engaged in a Ponzi scheme, using proceeds of sales from new properties to make guaranteed payments on existing properties.
The TIC investors, meanwhile, are left looking for new managers for the buildings or are faced with selling in a down market.
“Many of the investors are seniors who relied on these investments to live independently in their retirement,” Monica Lindeen, Montana state auditor and securities commissioner, said in a news release. “They have a right to know what happened to their money.”
An attorney from Lindeen’s office and former Montana U.S. Congressman Rick Hill, an affected investor, testified Friday, March 13, in Wilmington, Del., as to the need for an independent examiner and a forensic accounting in the bankruptcy case. DBSI investors throughout the country pooled their money in $10 and $15 increments to pay for Hill’s travel expenses.
Rhoades said she believed the DBSI case is the biggest security fraud case – involving the most money and most people – in state history.
But, it’s certainly not the only one.
As a result of chaos in the national financial market, the state’s securities division has been inundated with investor complaints and has more than 40 active investigations in progress. Of those investigations, 15 involve losses to Montana investors in excess of $1 million.
Overall, the agency says the cases being investigated affect more than 800 Montanans who have suffered a combined loss of almost $280 million as a result of alleged securities fraud.
“When the economy starts to decline, it’s harder to keep up fraud and scams,” Rhoades said. “The money stops coming in and they’re exposed.”
During the next two to three months, Rhoades said the state’s securities division will be negotiating settlement agreements with 10 big-named broker-dealer firms to resolve allegations of fraud in the sale of auction rate securities to more than 500 Montana investors.
The settlement agreements will likely result in nearly $200 million in rescission offers to Montanan investors as well as fines in excess of $2 million.
The investments sold by DBSI to investors were offered under a federal securities exemption, which preempts states from any regulatory review. Lindeen has met with the state Legislature and Montana’s delegation in Washington D.C. to encourage added state oversight.
“We need to make sure that as Congress moves forward with securities reform that state regulators have a strong role,” Rhoades said. “We’re here on the ground locally and can best protect those investors.”
Any Montanans considering investing can call the state auditor’s office at 1-800-332-6148 to check out the individual advisor, the firm, and the investment opportunity.