Another B/D Bites the Dust on BDSI

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GeorgiaGulf
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Joined: Mon Feb 28, 2011 8:21 pm

Another B/D Bites the Dust on BDSI

Post by GeorgiaGulf » Mon Nov 21, 2011 2:34 pm

DeWaay facing bankruptcy because of DBSI lawsuits
B-D asks judge for temporary injunction to halt arbitration claims filed with Finra; ‘Sword of Damocles'

By Bruce Kelly

November 21, 2011
Failed private placements issued by Medical Capital Holdings Inc. and Provident Royalties LLC have forced dozens of broker-dealers to close, be sold or seek bankruptcy protection.

Now, failed real estate tenant-in-common syndicator DBSI Inc. is threatening to have the same result, with DeWaay Financial Network LLC claiming in federal court last month that bankruptcy looms, due to lawsuits by clients who bought DBSI securities.

DeWaay Financial Network asked a federal judge in Delaware last month for a temporary injunction to halt eight arbitration claims that investors have filed with the Financial Industry Regulatory Authority Inc. stemming from DBSI losses.

DeWaay Financial Network “lacks sufficient funds to satisfy the claims in eight arbitration claims pending against it — let alone the potential claims of 304 other customers that have not yet brought suit. The threat posed by these mounting costs and the attendant potential for liability hangs over defendant's limited funds like the Sword of Damocles,” according to the firm's memorandum, which was filed in U.S. District Court in Delaware on Oct. 19.

“Absent injunctive relief, that sword's descent is imminent and in all likelihood would force defendant to declare bankruptcy,” according to the memo.

The Des Moines Register first reported DeWaay Financial Network's predicament this morning.

The company's request for an injunction is part of its strategy to create a settlement with investors, president Matt Stahr said.

“We still feel like we're in the right,” as the firm did its due diligence on the DBSI products, but the costs of defending the firm in individual arbitration claims are prohibitive, he said.

The firm has made substantial progress toward reaching a settlement but hasn't had a hearing yet regarding its request for an injunction, Mr. Stahr said.

DBSI raised $1 billion from investors by selling real estate deals through independent broker-dealers. The real estate firm declared bankruptcy in 2008.

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The memo raising the specter of bankruptcy at DeWaay Financial Network was one of the filings in a case that began in July when the trustee for the DBSI private-action trust, James R. Zazzali, sued DeWaay and five other broker-dealers that sold DBSI deals.

According to court filings, the eight DeWaay Financial Network clients suing the firm in Finra arbitration bought $2.9 million in DBSI securities. DeWaay Financial Network so far has spent $46,000 defending those claims and expects to spend another $1.1 million in defense costs.

Beyond those investors, DeWaay Financial Network sold DBSI securities to an additional 304 clients, and the firm's total exposure exceeds $24 million.

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