Witness: Creative accounting buttressed DBSI’s finances

Defense claims company did nothing illegal and portrayed its financial picture accurately.

jsowell@idahostatesman.comFebruary 21, 2014 

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Federal prosecutors laid out a painstaking case Thursday of how DBSI allegedly manipulated its finances to make it appear the Meridian property management company was in better financial shape than it really was.

Accountant Debbie Miller, who spent the entire day testifying, said the company counted millions of dollars in loans to three struggling technology companies as assets even though DBSI never received a penny in return. She said the company shuffled money to different bank accounts and held off paying bills at the end of each year to inflate DBSI’s net worth.

DBSI president Douglas Swenson, general counsel Mark Ellison and executive secretaries David Swenson and Jeremy Swenson are accused of a combined 89 counts of conspiracy, fraud and money laundering.

Their trial ended its third week Thursday. Jurors were given a break Friday and testimony will resume on Monday. Miller is only the fourth witness called by prosecutors. She will return to the stand Monday for continued cross-examination.

Miller told the jury of 12 women and four men, including four alternates, that millions of dollars in money paid by investors for building maintenance and upgrades was instead used to pay employee salaries and other general operating expenses. Less than 15 percent of that money went for its intended purpose, she said.

In 2007, for example, DBSI spent 87 percent of the $77 million it collected in what the company called “accountable reserves” on general expenses. Only 13 percent, about $10 million, went toward building improvements, she said.

A year earlier, only 10 percent of the money collected for improvements was properly spent, Miller said.

Financial documents on the company’s annual net worth failed to note separate line items for $235 million owned on speculative loans to three technology startup companies. Instead, those loans were counted as assets that were subtracted from payments to investors that, when placed on the company’s balance sheets, gave a skewed view of the real financial picture, U.S. Attorney Mark Williams contended.

Defense attorneys countered that DBSI disclosed $211.2 million in obligations on the books at the end of June 2007 that were secured by real estate and other assets of DBSI affiliates. The company listed $1.7 million in debt owed to DBSI that officials believed might not be collected.

“Did you see anyone doing anything you thought was cheating?” defense attorney Angelo Calfo asked Miller.

“No,” she said.

“Did anyone ask you to destroy records or do anything illegal?” he asked.

“No,” Miller said.

“The numbers on the financial statements are not false, are they?” Calfo asked.

“No, they aren’t false,” Miller said.

DBSI, which stands for Diversified Business Services and Investments, was founded in 1979 by Douglas Swenson, Ellison and another partner.

The business blossomed in 2003 after a change in tax law allowed investors to avoid capital gains taxes after selling an investment by pumping cash into shared investments — in which a group of people would buy a shopping center, office building or other commercial real estate.

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 — with a total 16.7 million square feet of commercial real estate — claimed it could meet its obligations to investors for two years even if it received no rent payments from tenants.

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.

At the opening of the trial, a defense attorney said Douglas Swenson sometimes earned $1 million a year, but pumped most of it back into the company.

On Thursday, Williams showed the jury a $14.1 million check from a DBSI subsidiary to the Internal Revenue Service on Swenson’s behalf for his 2005 federal tax payment.

John Sowell: 377-6423, Twitter: @IDS_Sowell

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