DBSI examiner reports commingled funds, insider money distribution

By Caroline Salls

Pittsburgh, Oct. 19 - DBSI, Inc.'s examiner reiterated his interim findings that the company's officers and directors commingled funds in a final report filed Monday with the U.S. Bankruptcy Court for the District of Delaware.

In addition, examiner Joshua R. Hochberg said in Monday's report that Douglas Swenson and other company insiders "distributed significant amounts of money to themselves."

As previously reported, Hochberg said in an interim report filed in August that "funds were commingled and used without regard to their sources or intended purposes."

Specifically, the examiner reported that the company's officers and directors used funds that were raised for specified purposes, including restricted proceeds from a 2008 unsecured bond issuance, to cover operating shortfalls and to make payments on other outstanding debts.

New findings

In addition to those findings, Hochberg said in Monday's final report:

• The DBSI Group's businesses were in continuous need of new investor funds to fund pre-existing obligations at least as early as 2005 and were burdened by huge high interest debt and master lease payment obligations, excessive insider distributions, and unrestrained losing investments in the Technology Cos. and the Kastera Cos.;

• A small group of management personnel, including Douglas Swenson, regularly tracked cash on a global basis and directed that investor funds be used to meet pre-existing obligations and operating expenses by evading restrictions governing the use of the investor funds;

• DBSI Group consistently operated at a loss, except for periods when sales to investors created booked profits;

• DBSI Group entities booked profits from inflated markups of real estate for sale to outside investors;

• DBSI Inc.'s guarantees of investments were "based on the cultivated false appearance that DBSI Inc. had substantial value;"

• The company used tenant-in-common investor and bond and note money interchangeably and pooled that money to make required payments when they came due;

• Several of the financial statements and other documents that were vital to the company's ability to continue to raise new funds from new investors were not independently audited or certified and created a "misleading financial picture of the DBSI Group;"

• DBSI Inc. and its related companies went to great lengths to market investment properties by stressing that the uses of accountable reserves were restricted to property improvements although they were really treated as a source of cash for DBSI's cash-strapped operating companies;

• Swenson and others managed and operated the DBSI Group businesses without regard for the separate identities of the companies;

• Swenson and others failed or refused to obtain appropriate outside, independent accounting or legal advice on issues for which they had serious conflicts of interest; and

• The company's financial and accounting records were "unreliable, unorganized, inconsistent and often unintelligible."

Meridian, Idaho-based DBSI controls a network of real estate entities. The company filed for bankruptcy on Nov. 10, 2008. Its Chapter 11 case number is 08-12687.

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