Investor lawsuit against DBSI claims fraud

Investors in DBSI have sued the Boise-based national real estate investment firm, saying it defrauded them of hundreds of millions of dollars.

Earlier this month DBSI delayed payments to some of its 12,000 investors, telling them that income from some rental properties is no longer enough to cover debt payments.

The lawsuit was brought by a trust on behalf of all investors with DBSI since October 2003.

The investors say the company collected $500 million in illegally gained profits as a result of fraud. Adding triple damages to that, as allowed by law, could boost the potential judgment to $2 billion.

Calls to the company seeking comment were not returned Friday.

The lawsuit alleges:

DBSI engaged in securities fraud, banking fraud and tax fraud.

The company ran a "Ponzi scheme" in which proceeds of sales from new properties were used to make guaranteed payments on existing properties.

DBSI principals, including president Doug Swenson, "raided the profits ... and failed to maintain any cash reserves to make guaranteed payments."

Until all sales were suspended in September, DBSI marketed real estate investment trusts, tenant-in-common properties and other investments. Tenant-in-common properties allow an investor to hold title to a fractional interest in a property.

DBSI's executive team - Swenson, John Mayeron and Charles E. Hassard - and 17 other defendants are named in the lawsuit.

A recorded message answers DBSI's main number. "We are working with a heavily reduced work force and have over 12,000 investors seeking immediate communication," the machine said. The message directed callers to a blog where DBSI is updating investors: blog.dbsi.com.

The blog says DBSI began hosting conference calls for investors last week.

The lawsuit seeks triple damages, punitive damages, costs and interest for all investors from October 2003 to the present.

In September, DBSI cut its sales staff and suspended sales, blaming the credit crunch and the real estate downturn. In Boise, 70 jobs were cut. In October, offices in Dallas, Chicago, St. Petersburg and Atlanta were closed and 300 more workers were laid off.

As late as September, the company was still buying property. In August, it announced the purchase of four major land parcels in Phoenix, Reno, Las Vegas and Orlando worth more than $22 million. In September DBSI said it was preparing to break ground for phase 1 of Salt Lake Valley's first lifestyle office park.

The company manages 16 commercial properties in the Boise area. Kastera Homes, a home builder in the Treasure Valley, is a DBSI subsidiary.

Brad Talbutt: 672-6737