In recent years, DBSI Notes were aggressively and fraudulently sold to conservative investors and retirees as a guaranteed income-generating investment.
Most investors harmed by DBSI Notes believed they were investing in a security that would pay them regular dividends earned from DBSI’s real estate holdings. Unfortunately, DBSI Notes were not “guaranteed.” In fact, they were highly unsuitable and highly fraudulent investment for the majority of the people who bought them.
The Financial Industry Regulatory Authority (FINRA) prohibits brokerage firms and stockbrokers from selling DBSI Notes to specific kinds of investors, especially investors who can’t afford the risks associated with such investments.
If you lost money because your brokerage firm recommended you buy DBSI Notes, you may be able to recover your losses by filing a FINRA arbitration claim for damages.
How DBSI Note Fraud Happened
Prior to the collapse of the real estate bubble in 2007 and 2008, brokerage firms across the nation were aggressively marketing real estate based investments to conservative retirees looking to produce a safe and reliable income for their retirement.
Tenants In Common investments (or TICs) quickly became a popular way of dividing ownership in real estate property across a large pool of investors. DBSI was the leader in creating such TICs.
Each investor who bought a piece of a DBSI TIC note was to receive a portion of the income generated from the property as well as any profits generated from the sale of the property.
Because DBSI TICs appeared to be solidly based on hard real estate assets, and because they offered a much higher rate of income than other retirement investments at the time, it was very easy for stockbrokers to misrepresent the risks of these investments and sell them to unsuspecting retirees and conservative investors.
Combine this with the fact that TICs pay some of the highest commissions in the industry (between 7% and 12%) to the brokers who sell them, and you start to see why so many consumers were defrauded by DBSI Notes.
The Truth About DBSI Notes
In reality, DBSI TICs were not safe and conservative investments and they were not in the least bit guaranteed. They were 100% dependent upon the welfare of the real estate sector of the economy. Therefore, they provided zero balance and safety in the event of a real estate sector collapse. This is exactly what happened and many people were harmed as a result.
In fact, during 2007 and 2008, when TICs was most aggressively sold, the real estate sector was experiencing unprecedented levels of volatility. Real estate was not the stable kind of investment it used to be and every single stockbroker who sold TICs to unsuspecting consumers was well aware of this fact.
Another reason DBSI TICs were so unsuitable for retirees is that they were extremely difficult to sell out of once you purchased one, making them very illiquid investments. Many investors, especially retirees, need access to their funds in the event of an emergency, but a TIC investment denies the investor this ability. Stockbrokers were aware of this fact too, yet they still inappropriately sold DBSI TICs to investors.
DBSI Was Operating a Ponzi Scheme
Out of all the TICs that were fraudulently sold to conservative investors and income-dependent retirees, DBSI TICs, in particular, have caused some of the most devastating financial damages. After DBSI went bankrupt in November 2008, it was reported that DBSI had been conducting business in a highly fraudulent manner.
DBSI was lying to its investors, mixing investor funds and making dividend payments to certain investors with the profits from other investments. Essentially, DBSI had created a Ponzi scheme to cover up the fact that their “guaranteed” real estate investments were just not profitable. The SEC has also looked into DBSI for mishandling of customer assets and fraud.
Recent claims illuminate DBSI’s Ponzi scheme tactics further. Apparently, DBSI was using income from profitable properties and from real estate sales to meet the dividend requirements of investors who had bought into TICs that weren’t profitable. Also, the cash from recent investors was being re-directed to pay dividends to older investors (clearly, the last resort Ponzi scheme tactic). When the real estate markets continued to collapse, DBSI ran out of properties to sell and ran out of new investors. The Ponzi scheme failed and DBSI was forced into bankruptcy, causing massive financial damages to investors.
Know Your Rights
In selling DBSI Notes to conservative investors and income-dependent retirees, brokerage firms across the nation violated multiple state and federal laws and FINRA regulations like:
- Breach of fiduciary duty
- Unsuitable investment advice
- Fraud by omission/misrepresentation
- Breaches of contract
- And much more
The idea that a stockbroker or brokerage firm would use deceit and misrepresentation to sell such inappropriate investments, like DBSI Notes and TICs, to unsuspecting conservative investors and mom and pop retirees is unconscionable.
However, the fraud is understandable considering that DBSI Notes paid between 7% and 12% commissions to the brokers who sold them. Perhaps even more disturbing, though, is how insignificantly small these commissions were in comparison to the millions of dollars lost by innocent consumers who were the victims of DBSI Note fraud.
Try and Get Your Money Back
The Financial Industry Regulatory Authority (FINRA) has already awarded millions of dollars in damages to victims of DBSI Note fraud. Although the strength of each case is different, you may be eligible to receive similar compensation. But you must take action immediately to preserve your rights.
Pursuing a stock fraud negligence claim will teach Wall Street brokerage firms that it’s completely unacceptable to take advantage of consumers. Your claim may even prevent others from suffering as you have by forcing Wall Street brokerage firms to conduct business with honesty and integrity.
You may be eligible to receive compensation regardless of whether you sold or continue to hold the securities at issue. Contact us today to set up a free consultation. We will listen to your story, answer any questions you may have and discuss your legal rights and options.