DBSI fraud case heads for trial — just don't call it a 'Ponzi scheme'

Prosecutors say executives of the Meridian-based company painted a rosy financial picture on the way to bankruptcy.

jsowell@idahostatesman.comJanuary 31, 2014 

  • What is a Ponzi scheme?

    The phrase got its name from Charles Ponzi, who in 1920 raked in more than $2 million a week at his office in Boston selling coupons that could be redeemed for priority airmail stamps. Ponzi promised investors they could receive returns of 50 percent in 45 days or 100 percent in 90 days.

    Money from new investors was used to pay earlier investors, making the scheme seem legitimate. The investors who got paid talked up the scheme, drawing in more investors.

    The swindle later unraveled and Ponzi eventually spent five years in prison.

Douglas L. Swenson and three other top executives of the failed property investment giant are charged with a combined 89 counts of fraud, conspiracy and money laundering in an alleged Ponzi scheme.

But when the trial gets underway Monday in Boise, don’t expect federal prosecutors to use that term in describing the company’s alleged practice of taking money from new investors to pay guaranteed returns to existing investors at a time when it was losing $3 million a month.

Defense attorneys scored an early victory after convincing Chief District Judge B. Lynn Winmill to prevent Assistant U.S. Attorney George Breitsameter and other prosecutors from using the phrase "Ponzi scheme" during the expected eight- to 10-week trial.

“The phrase ‘Ponzi scheme’ is unfairly prejudicial and inflammatory,” Seattle attorney Angelo Calfo, who represents Swenson, wrote in his motion. “Moreover, the question of whether DBSI was a “Ponzi scheme” is irrelevant to the allegations in the (indictment). The focus of the trial should be proof of the charges in the indictment — mail and wire fraud, securities fraud, and bank fraud — and not on the collateral and irrelevant issue of whether DBSI meets the criteria of a Ponzi scheme.”

Swenson, DBSI’s president; Mark A. Ellison, a DBSI co-founder and later the company attorney; and Swenson’s sons, David D. Swenson and Jeremy S. Swenson have each pleaded not guilty to the charges.

In the indictment against the four men, prosecutors twice asserted that DBSI “essentially operated like a Ponzi scheme.”

UNDER THE RADAR

Founded in 1979 and headquartered in Meridian, DBSI operated for years with a low profile. It wasn’t until 2003 that the company began attracting large numbers of investors, the government alleges, through the sales of fractional interest in commercial properties and undeveloped land.

DBSI offered groups of investors a guaranteed yearly return of 6.5 percent on business properties, paid monthly, and 7 percent on unimproved land, paid quarterly. The investors became the owners of the properties, which were then leased back to DBSI for 10 to 20 years. The company was to manage the properties, collect lease payments from tenants and service debt.

In 2007 and 2008, DBSI claimed it had a net worth of more than $105 million, including $15.4 million in cash and funds available for immediate access. The company, which had office and retail developments in 34 states, claimed it could meet its obligations to investors for two years even if it received no rent payments from tenants.

Prosecutors say the true net worth was nowhere near that. They allege the properties with guaranteed payments quickly became unprofitable and that DBSI was dependent upon funds from new investors to make payments to older investors. The government claims the only real profit gained by the company was through buying properties and charging investors a premium of 20 percent to 30 percent more for the same properties.

“DBSI was extremely successful in marketing and selling (fractional) investments, based in large part on the ... fixed rate of return,” Breitsameter wrote in the indictment. “Investors were eager to invest with DBSI, believing that the (guaranteed payments contact) largely alleviated risk because the investor would be paid a fixed return, regardless of how their underlying property performed.”

LOSSES PILE UP

The government contends that by 2007, DBSI was losing $3 million a month on its fractional investment portfolio. New investments were needed to meet existing obligations, prosecutors claim.

The company, which included Idaho-based Kastera Homes and Western Electronics, declared bankruptcy in late 2008.

DBSI is also accused of misusing more than $80 million of $99 million in reserve funds put up by investors to take care of capital expenses, tenant improvements and leasing commissions at the investor-owned buildings. Lease agreements stated the money could not be used for operational costs and the portion that was unused after the 10- or 20-year leases expired was to be returned to investors.

The money was used instead, prosecutors said, to make required payments to investors, to pay general operations costs and to make speculative loans to technology startup companies.

By mid-2008, $235 million was owed on those loans, according to court documents. They were never repaid.

The defense denies the allegations and says DBSI executives acted in good faith and disclosed all material information to investors. Douglas Swenson and other executives deny the company made any material misstatements.

The government is also seeking $169 million in cash and properties that could be used to reimburse investors, along with another $3 million in cash that prosecutors say was part of the money laundering allegation.

Jury selection for the trial is expected to take place Monday, with opening statements scheduled for Tuesday.

Gary Bringhurst, DBSI’s chief operating officer, pleaded guilty last year to conspiracy to commit securities fraud. He is scheduled to be sentenced April 29.

John Sowell: 377-6423, Twitter: @IDS_Sowell

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