Investors and Valley businesses alike get caught in DBSI's collapse

jsowell@idahostatesman.comMarch 16, 2014 


    Statesman public safety reporter John Sowell viewed thousands of pages of documents filed with the U.S. Bankruptcy Court in putting together this report.

Value Heating and Air Conditioning maintained heating and cooling systems for buildings owned or managed by DBSI for six years.

The Meridian company was a good customer and promptly paid its bills to the Star business owned by Daniel Ricken.

Even after DBSI declared bankruptcy in November 2008, Ricken had his technicians continue to service the DBSI account. That decision cost Value Heating $6,000 in service fees.

Then the bankruptcy trustee went after Value Heating, demanding that Ricken turn over $17,404 in payments made by DBSI in the three months before the company declared bankruptcy.

"I was pretty upset," Ricken said. "They didn't pay those invoices and then I was asked to hand over money we had received for past work. It was a bad situation."

Federal bankruptcy law allows a trustee to recover questionable payments made in the three months before a company declares. It is meant to prevent company officials from dumping cash before a business fails.

DBSI bankruptcy trustee James Zazzali, former chief justice of the New Jersey Supreme Court, filed court actions against more than 1,350 companies that did business with DBSI, along with security brokers who received sales commissions.

Most of the claims involved companies that weren't accused of anything shady, such as Value Heating. They performed a service or provided a product and were paid during the three-month window.

A $23,034 claim was filed against a Meridian excavation company.

Zazzali, who was appointed by the Delaware bankruptcy judge handling the case, sought $16,311 from a Boise advertising company and $13,560 from a Meridian window blind company.

Even the city of Boise wasn't immune. The trustee sought the return of $19,915 paid by two DBSI subsidiaries for building permits for a housing project and a sewer permit.

"That's the first time we've been dragged into a bankruptcy like that," city Building Director Jenifer Gilliland said.

The city successfully challenged the claim but had to hire outside lawyers to handle the matter.

"We had done the work and there was no way for us to know DBSI was in trouble," Gilliland said.

Ricken ended up settling with the trustee for a smaller, unspecified amount. Other business owners said they paid as little as 10 cents on the dollar to resolve their claims.


More than 22,000 claims have been filed with the trustee by investors, property owners, vendors, and state and local governments seeking to recover more than $102 billion from DBSI's collapse.

Zazzali has already spent five and a half years sorting through individual files and trying to recover money for the claimants. It could take another two or three years to complete the process, said Brian McMahan, a New Jersey attorney working on behalf of the trustee.

In the end, 8,500 DBSI investors - people who in some cases sank their life savings into the company - will be lucky to recover pennies on the dollar.

"It's a sad story," said Garden Valley resident Jay Rais, whose family invested and lost a lot of money.

Before the collapse, DBSI managed 280 shopping centers, office buildings and other commercial buildings in Idaho and 33 other states. The holdings were worth $2.7 billion; many of them were owned by groups of investors to whom DBSI sold fractional shares.

Shortly before filing for bankruptcy, DBSI was losing $8 million a month. Only a quarter of its business properties were making money. The rest were bleeding red ink, yet the company was responsible for paying Rais and other investors a total of $8.7 million a month.

Sorting out the company's finances has been difficult, federal bankruptcy Judge Peter J. Walsh said in court documents. Company funds were commingled among hundreds of DBSI entities, creating a "hopeless tangle," he said.

"The ledgers maintained by the various DBSI entities reflect transactions of staggering complexity," Walsh wrote in one court opinion. "Yet, those ledgers do not provide a reliable guide because the actual movement of funds was frequently quite different than what was recorded."


The company sprang from modest roots. Douglas Swenson, Mark Ellison and John Palfreyman - certified public accountants for Touche Ross - formed Diversified Business Services and Investments in 1979. Ellison's father loaned the trio $30,000 in startup funding.

DBSI began by offering investments in commercial real estate, mostly hotels and low-income housing, and managed those and other properties. The company made money from the sale of investments, from management fees and from profits generated after investors recouped their investments.

Many of DBSI's 16 holdings in the Treasure Valley were familiar Boise shopping centers: the Plantation and Northgate centers on State Street, the Broadway Plaza on Broadway Avenue and the Mid-Valley Plaza and Fairview Plaza West, across from one another on the east side of Fairview Avenue at Five Mile Road.

Ellison and Palfreyman, who are attorneys, sold their interests in 1992. Swenson became the majority owner. In subsequent years, he added to his holdings and eventually owned 91 percent of DBSI.


Swenson, Ellison and Swenson's sons, Jeremy Swenson and David Swenson, are on trial in federal court, accused of illegally using money from new investors to make the guaranteed payments to existing ones. They are charged with a combined 89 counts of conspiracy, fraud and money laundering.

Government attorneys have accused the company of running a shell game, creating hundreds of entities and shuffling money between them to make DBSI seem profitable. Nearly all of the money made by DBSI came from investors, not from providing legitimate services, prosecutors said.

All four defendants deny the charges. They say the company's demise was due to the 2008 collapse of the real estate market.

"It wasn't a money-laundering operation. It was a small, family-owned business," Patricia Eakes, an attorney for Douglas Swenson, said in court.


DBSI's fortunes grew quickly following a 2002 ruling by the IRS allowing commercial property owners to sell holdings and reinvest in other properties without being saddled with capital gains taxes.

In 2004 alone, DBSI's ownership of shopping centers and office buildings ballooned from 30 to 100, Michael Attiani, the company's former vice president of property management, testified in the criminal trial.

Between 2004 and August 2008, DBSI acquired more than 200 commercial properties in 30 states. The company also had $100 million worth of undeveloped land.

For investors, DBSI offered guaranteed returns of 6 percent annually for shopping centers and 7 percent for office buildings, paid monthly.

The change in the IRS interpretation was attractive to the owners of small building complexes who managed their holdings but had grown tired of dealing with what one DBSI investor, Bill Marvel, referred to as the "three T's: toilets, tenants and trouble."

Marvel, who worked in spacecraft development and design before he retired, self-managed several California apartment complexes he owned. In 2004, he invested $3.5 million in portions of 15 DBSI shopping centers and office buildings. He was one of about 400 investors with ownership in those properties.


Despite the rapid infusion of cash from investors eager to take advantage of the tax incentives, some DBSI accounting employees believed as early as 2004 that the company might be failing because of severe cash shortages.

Two years later, shortages were such a problem that DBSI formally monitored cash needs on a companywide basis, according to documents filed in federal bankruptcy court.

From early 2005, Swenson and a half-dozen senior management and accounting officials began meeting weekly to review the company's cash obligations and requirements.

By 2006, DBSI was largely dependent on cash from new investors to fund daily operations and to provide payments for earlier investors, records show. In November 2006, for example, DBSI required $30 million in new investments to break even. Actual sales totaled just more than $10 million, according to court documents.


The need for new investment cash placed pressure on company land managers to move quickly to identify and obtain shopping centers and office buildings to add to DBSI's real estate portfolio, Attiani testified.

"They wanted to buy as much as they could," he said.

A large number of buildings that DBSI considered buying received poor evaluations, yet the company bought them anyway so it could build up its inventory - against his advice, Attiani said. The company often paid considerably more than a property was worth.

Company officials "became so desperate for 'product' (i.e., commercial real estate) that they were willing to have DBSI purchase unprofitable real estate at unjustified prices just to continue the cash stream generated by constant buying and selling, in order to prop up their pyramid scheme," Zazzali wrote in a bankruptcy filing.


The 2007 purchase of a 178-acre parcel at the corner of Meridian and Victory roads in Meridian seems to illustrate Zazzali's statement.

On Feb. 26, 2007, Kastera Homes, a DBSI homebuilding subsidiary, bought the undeveloped Tanana Valley property from Boise property developer Marty Goldsmith for $28.8 million, according to bankruptcy records.

Goldsmith had purchased the property only four months before, according to records from the Ada County Assessor's Office. Goldsmith paid $19.3 million to previous owner Justin Martin - an employee of Goldsmith's real estate development company, Farwest LLC - meaning Goldsmith pocketed $9.5 million profit on the sale to DBSI, according to bankruptcy records.

Kastera had initially agreed to pay Goldsmith $35.8 million, about $202,000 per acre. Joe Swenson, Kastera's CEO, challenged the valuation and said the company could not pay more than $105,000 per acre - $18.7 million total - and still make a profit on the project.

According to Zazzali, Douglas Swenson and another top DBSI official, Thomas Var Reeve, later pressured Joe Swenson to produce an analysis that supported the $35.8 million purchase price. The Kastera CEO offered two options, the highest of which justified a price of $26 million to $27 million.

The final deal gave Goldsmith $28.8 million.

"Douglas Swenson and Var Reeve agreed to this price despite all indications that the fair market value for Tanana Valley did not approach anywhere near $28.8 million and despite Joe Swenson's most recent analysis indicating the property should not be acquired for more than $18.7 million," Zazzali wrote in an unjust enrichment claim filed against Goldsmith for return of the entire sale amount.

Goldsmith denied doing anything untoward and is contesting the return of the money. The matter is pending in federal bankruptcy court in Boise.

After DBSI declared bankruptcy, the properties were sold by the bankruptcy trustee to other development companies for an undisclosed amount. Apartment complexes and homes are now under construction.


Rais, Marvel and other investors were attracted to DBSI, in part, by its seemingly stellar reputation and company claims that no investor had ever lost money, and because DBSI had provided significant annual returns even during poor real estate markets.

Jay and Scott Rais, along with their mother, Kelva, owned 48 percent of two office buildings in Chicago. In 2008, another investor in one of those buildings learned that DBSI had failed to pay property taxes for two years to Cook County.

Later, they found out that upkeep on the buildings had been neglected and that their two major tenants were not interested in extending their leases.

Rais and the other owners moved to cancel DBSI's management contract. It took effect the day before DBSI filed for bankruptcy.

As a result, those buildings were kept out of the bankruptcy proceedings and the investors were able to sell them. Still, they took a big hit. The buildings, valued at $5 million, were sold for $700,000. Plus, the investors had to put up $80,000 to make repairs to the structures before they could be offered.

"What I say is that 15 percent was better than zero," Rais said. "It sounds like most of the DBSI investors are getting a lot less."

John Sowell: 377-6423, Twitter: @IDS_Sowell

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