Four former executives of DBSI, one of the largest sponsors of tenants-in-common (TIC) interests, have been indicted on 83 counts of securities fraud, wire fraud, mail fraud, and interstate transportation of stolen property. The indictment is seeking approximately $169 million in forfeiture of properties and assets, alleging that the executives misrepresented the financial condition of DBSI to potential investors. The executives named were former president Douglas Swenson, general counsel Mark Ellison, and David and Jeremy Swenson (sons of Douglas Swenson) who were assistant secretaries.
TIC interests are real estate investments that became popular in the early to mid 2000s. TICs were used as part of a 1031 exchange, whereby an investor who owned an income-generating property could exchange that property for another real estate investment (the TIC interest) and thereby defer any capital gains taxes on the sale. TICs typically hired external property managers (sometimes affiliated with the TIC sponsor), and were marketed to investors as passive income generating properties. TICs were sold to thousands of small investors across the country, with over $14 billion in equity investment since 2002 according to the Wall Street Journal. Our own research on tenants-in-common interests suggests that TIC interests were saddled with extremely high fees and were often marketed with over-optimistic cashflow assumptions.
Bruce Kelly of InvestmentNews notes that:
DBSI was acting like a Ponzi scheme, relying on new investor funds, including investor money that the company said would be used only in particular circumstances, to continue operations and pay returns to other investors, according to the indictment.In addition to syndicating TIC interests, DBSI also issued high yield notes through private placements. Both TIC interests and real-estate related private note programs were common in 2005-2008. DBSI declared bankrupcy in 2008, and on Wednesday its former COO Gary Bringhurst was indicted on similar charges and agreed to plead guilty to one count of conspiracy to commit securities fraud.
The SEC charged two of DBSI's real estate investments, known as MedCap and Provident, with securities fraud in 2009, which shut down shortly thereafter. Those investments led to FINRA actions against broker-dealers who sold those investments without proper due diligence.
DBSI and indeed much of the TIC industry highlights the risks of private placement investments, which often lack sufficient transparency for investors to appreciate the often substantial underlying risks.