DBSI alleged securities fraud to be investigated by examiner

By Caroline Salls

Pittsburgh, March 17 - The State of Idaho's Department of Finance won court approval for appointment of an examiner in DBSI, Inc.'s bankruptcy case, according to a department news release.

According to the release, judge Peter Walsh of the U.S. Bankruptcy Court for the District of Delaware has given the examiner the authority to probe $2 billion in allegedly fraudulent securities transactions made by DBSI in a scheme involving more than 12,000 investors and 270 properties throughout the country.

"This is more than just a bankruptcy case," Idaho lead trial counsel and Potter Anderson & Corroon LLP partner David J. Baldwin said in the release.

"The State of Idaho alleges fraudulent activity that mirrors a Ponzi scheme, making it a sophisticated investor fraud.

"It is important to have someone whose focus is on the potential wrongdoing of the companies and not just on the process of a typical bankruptcy proceeding."

DBSI allegedly used powers of attorney, signed by investors at real estate closings, to convert non-recourse loans to recourse loans, making investors personally liable without their knowledge, according to the release.

"Investors were also assured there would be 'accountable reserves' benefitting their properties," Baldwin said in the release. "It's now been shown that DBSI never set aside such reserves at all.

"These investors arguably are now personally liable and the reserves they expected would be there with their properties don't exist."

Idaho, the state where DBSI is located, was joined by Alabama, California, Colorado, Hawaii, Montana, Nevada, Oregon, Pennsylvania, South Carolina, Tennessee and Washington in its request for appointment of an examiner.

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

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