A federal grand jury in Idaho has indicted four executives of DBSI Inc. as a result of the executives’ involvement in the sale of fraudulent private placement securities. The executives face charges including conspiracy to commit securities fraud, wire fraud, mail fraud and interstate transportation of stolen property.

DBSI purportedly operated like a Ponzi scheme, relying on new investor money to pay returns to earlier investors. The DBSI executives charged include Douglas Swenson, 64, co-founder and former president of DBSI; Mark Ellison, 64, co-founder and general counsel; and two sons of Mr. Swenson – David, 35, and Jeremy, 40, who were assistant secretaries.

DBSI raised money primarily through sales of high yield notes and sales of securities known as “tenant-in-common,” 1031 exchanges known as TICs. DBSI claimed to be profitable when it actually was bleeding cash, according to the indictment.

The indictment came one day after federal prosecutors reached a plea agreement with after DBSIs former chief operating officer, Gary Bringhurst, agreed to plead guilty to one count of conspiracy to commit securities fraud for falsifying DBSI’s financial statements that were used to mislead investors.

Since approximately 2008, investors collectively have lost more than $1 billion in three fraudulent private placements, DBSI, Medical Capital Holdings Inc., and Provident Royalties LLC. Approximately 50 smaller broker-dealers throughout the United States sold these fraudulent securities to unsuspecting investors. Each of the securities promised high yields to investors in the mid-2000’s.

These securities proved disastrous for investors. DBSI declared bankruptcy in 2008. MedCap and Provident shut down in 2009 after the Securities and Exchange Commission charged both with securities fraud. Investors filed hundreds of FINRA arbitration claims against the brokerage firms that sold the fraudulent investments, claiming, among other things, that the brokerage firms had failed to perform adequate due diligence on the securities. Unfortunately for many investors, many of the brokerage firms that sold the products were undercapitalized, underinsured, and even uninsured. As a result, many of the brokerage firms have since shut down and filed for bankruptcy protection, leaving investors with little to no way to recover the hundreds of millions of dollars that they lost.

While no one expects to fall prey to investment fraud, investors would be wise to do business with well-capitalized and well-insured brokerage firms. That way, when and if the brokerage firm causes investment losses, investors would have a means to recover their investment losses.

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