As DBSI swirled toward bankruptcy in 2007 and 2008, key executives put the company's net worth at $105 million. In reality, federal prosecutors say, one of its key programs was losing $3 million a month.
Executives portrayed the company as profitable. An indictment says DBSI and its related companies were universally unprofitable.
As DBSI guaranteed fixed rates of return for investors in its properties, the company ran a scheme that took new investor money to run operations and pay other DBSI investors, investigators say.
A grand jury brought fraud and conspiracy charges Wednesday against four DSBI principals, including its founder and CEO, 64-year-old Douglas L. Swenson of Eagle, and his sons, Jeremy S. Swenson, 40, of Meridian, and David D. Swenson, 35, of Boise. Also indicted was Mark A. Ellison, 64, of Boise, a co-founder with Swenson in 1979 who left the company and then returned as its general counsel.
The government's 83-count indictment accuses the four men of securities fraud, wire fraud, mail fraud and interstate transportation of stolen property, along with conspiracies to commit those crimes. In addition, they face charges of bank fraud. Douglas Swenson was also charged with conspiracy to commit money laundering.
Attorneys for Douglas Swenson and Mark Ellison said the men are innocent. Attorneys for Douglas Swenson's sons did not return phone calls.
DBSI BILKED INVESTORS, U.S. ATTORNEY SAYS
The charges were the latest development in the saga of a once-respected local company that lost millions of dollars invested by thousands of people who were attracted by DBSI's promises of sure-fire profit on their purchases of pieces of shopping centers and office buildings around the country. The indictments came two days after Gary Bringhurst, DBSI's chief operating officer, pleased guilty to conspiracy to commit securities fraud.
"Although the defendants knew DBSI's true deteriorating financial position, they withheld accurate financial information and took steps to conceal DBSI's true financial condition from investors, financial advisers, brokers ... DBSI wholesalers and other DBSI employees," said Wendy Olson, Idaho's U.S. attorney.
DBSI's properties included commercial buildings in the Treasure Valley, although those were not among the properties involved in deceptive investment schemes cited in the 61-page indictment.
WHAT PROSECUTORS SAY HAPPENED
DBSI grew into a collection of companies involved in real estate and technology, including Treasure Valley businesses such as Kastera Homes and Western Electronics.
The company started selling investment products, including tenant-in-common investments, known as TICs, under section 1031 of the U.S. tax code. So-called 1031 investments allow people who sell a property and make a profit to avoid paying capital gains taxes by re-investing their earnings in other property. They were a driving force in the commercial real estate explosion through about 2006.
The TICs were fractional shares of commercial properties. Prosecutors say DBSI would buy properties and resell them for 20 percent to 30 percent more than it paid, by splitting the properties' ownership into TIC investments. DBSI would continue to manage the properties. The investors would receive a guaranteed 6.5 percent profit per year under DBSI's "master leases."
But the master leases became unprofitable when rents from tenants failed to generate enough revenue to pay expenses and sustain the guaranteed payments to investors, prosecutors say. By 2007, the program was losing $3 million a month.
TECH COMPANIES' BIG DEBTS UNPAID
DBSI also told investors that it held a "small non-real estate" portfolio of businesses for diversification. In fact, DBSI's Western Technologies and Stellar Technologies companies held a bevy of small companies that together owed DBSI $235 million by mid-2008 - money never repaid, prosecutors said.
The fraud and conspiracy charges involve offerings to investors for commercial projects in six states: Virginia, Illinois, Georgia, Missouri, North Dakota and Texas.
The bank-fraud charges involve properties in Illinois and Georgia. Prosecutors say DBSI made false statements to obtain loans for buildings it wanted to buy and resell to the TIC investors.
The company filed for bankruptcy in November 2008.
GETTING BACK THE MONEY
Prosecutors are seeking the recovery of $169 million in property and assets that could be returned to investors. The indictment lists residential properties in Boise and Meridian, as well as investment and retirement accounts held by Swenson family members, among the possible sources of the forfeitures.
Olson said she hopes there are assets available, but "admittedly it is difficult" to recover such money.
Olson said the investigation was one of the most complex in her 16 years as a federal prosecutor. Investigators sifted through thousands of documents and compiled financial transactions from North Dakota to Georgia, she said.
Stephen Boyd, the Internal Revenue Service's special agent in charge for criminal investigations in Idaho, said the government will continue to pursue corporate officers who victimize investors.
"The investigation team uncovered a scheme to defraud investors that was like a house of cards," said Boyd, whose agency worked with the FBI on the government's case.
DEFENDANTS' LAWYERS CONFIDENT
Douglas Swenson's attorney blasted the indictment as thin and wrong. Investors knew the risks and were told their money would be used to repay old debt, said Angelo Calfo, a Seattle lawyer. "This is messed up," he said.
His client owned more than 90 percent of the company and would not have benefited from its demise, Calfo said. "They never misled anybody," he said.
Boise attorney David Nevin said Ellison also is innocent. "I hope the government comes to see that, but if they don't, I am certain a jury will," Nevin said.
Investor Bill Marvel, a resident of Grand Junction, Colo., says he was misled.
Marvel said he won't see a penny from the forfeitures and expects to lose most of his $3.5 million investment in fractional ownerships he bought from DBSI. Marvel said he and his wife have already lost most of the 15 buildings in which they invested. They expect to lose all of them through foreclosure or sales at low prices, ending up with about $500,000.
"I am elated that people are going to suffer the consequences," Marvel said.
If convicted, each of the men could serve decades in prison, Olson said.
Bringhurst's sentencing is scheduled for July 26. He faces up to five years in prison and a $250,000 fine.
A New Jersey lawyer who heads two trusts trying to recover money for investors and creditors has filed nearly 900 lawsuits. James Zazzali has won judgments against some recipients of DBSI money, including several in state court in Boise.
Bill Roberts: 377-6408