TIC Deals Come Back to Haunt Some B-Ds
The real estate bust has taken a toll on tenant-in-common investments, and no one knows this better than some of the broker/dealers behind the deals. As reported Feb. 19 by Investment News, several B-Ds have been on the losing end of several recent awards announced by arbitration panels with the Financial Industry Regulatory Authority (FINRA) in cases involving TICs.
Most of the claims are tied to a leading TIC sponsor, DBSI, which filed for bankruptcy protection in 2008. Prior to declaring bankruptcy, DBSI controlled 244 commercial properties and had more than 8,500 investors. After its bankruptcy filing, investors who had purchased TICs with DBSI were left scrambling to save what little they could of their investments.
Since then, an examiner appointed by the bankruptcy court in 2009 has reported that DBSI was an “elaborate shell game and that new investor money was being used to pay off existing investors.”
According to the Investment News article, investors have filed FINRA arbitration claims for $12.6 million in cases involving direct broker/dealer sales of TIC deals from DBSI. As of June 2010, arbitration panels had awarded investors $4.8 million in those cases.
TIC investments provide a fractional ownership in a real estate property and involve two or more parties. Once a popular investment, TICs began to experience a fall from grace following the burst of the real estate bubble. Once that happened, many TIC investors realized that their real estate investments were not the same deals described by the broker/dealers that sold them.
“It’s remarkable to me that the broker-dealers think they can handle their clients this way, by allowing a Ponzi scheme to be sold and essentially assisting in its sale without complying with specific rules that FINRA has set up for due-diligence obligations,” said a lawyer quoted in the Investment News article. Broker-dealers “allowed prospectuses and documents to go out [to investors] without minimal due diligence about central representations to the deal,” he said.
The high commissions – about 7% – may have been a key enticement for the mischaracterizations of TIC products.
Meanwhile, DBSI founder and CEO Doug Swenson has been charged by the Idaho Department of Finance for allegedly creating a scheme to defraud investors. According to a Feb. 8 article by the Idaho Statesman, Swenson could face charges of tax evasion, money laundering, racketeering and securities fraud.