Sales of tenant-in-common exchanges (TICs) have come back to haunt a number of broker/dealers, as they face a lawsuit brought by the trustee of one of the biggest creators and distributors of TICs – DBSI Inc.
DBSI, which defaulted on its payments to investors in 2008, has filed for Chapter 11 bankruptcy protection. Now, James Zazzali, the trustee in charge of the bankruptcy, is taking legal action against nearly 100 broker/dealers that sold the doomed product. The lawsuit, which was filed in November, alleges that the TIC from DBSI was actually a $600 million Ponzi scheme.
As reported Dec. 8 by Investment News, the five biggest earners of commissions for selling DBSI include: Berthel Fisher & Co. Financial Services Inc.; QA3 Financial Corp.; DeWaay Financial Network LLC; The Private Consulting Group, which shut down last year; and Questar Capital Corp.
Many of the firms listed in the DBSI lawsuit already are waging similar legal battles over failed private-placement deals. Among those on the DBSI list: Brecek & Young Advisors Inc., which merged into Securities America Corp. in 2009; KMS Financial Services; J.P. Turner Co. LLC; and Alternative Wealth Strategies Inc.
Unlike other private-placement investments that have hit hard times recently, DBSI has not been charged with fraud by the Securities and Exchange Commission (SEC). In July 2009, two high-profile private placements, Medical Capital Holdings Inc. and Provident Royalties LLC, were sued by the SEC for fraud. In the case of Provident Royalties, more than 40 broker/dealers that sold the product have been sued by Provident’s receiver.
A TIC is a real estate investment in which two or more parties own a fractional interest in a select property. The investments became popular in 2002 after the Internal Revenue Service ruled that investors could defer capital gains on real estate transactions involving the exchange of properties.