Brokerage firm DeWaay Financial Network faces the threat of bankruptcy as the result of lawsuits filed by angry investors in high-risk real estate investments, based upon court papers filed by the company last month.
As a result, lawyers for Clive, Iowa-based DeWaay Financial Network has asked a federal judge for a temporary injunction to prevent eight investor claims against the company from proceeding to arbitration hearings conducted by the Financial Industry Regulatory Authority (Finra).
If these investor claims proceed, DeWaay officials said it could conceivably cost the firm as much as $4 million on total investments of $2.9 million, according to court papers filed by the company in federal court in Willmington, Del. last month.
DeWaay officials could not be reached for immediate comment.
DeWaay Financial Network's financial problems developed this year from it selling high-risk private placement investments -- particularly real estate deals for DBSI Inc., an Idaho-based firm that packaged real estate deals, as well as oil and gas development deals.
With total reported assets of $3.4 million, broker-dealer DeWaay Financial Network officials indicated in court papers its total liability could run as high as $24 million on claims from 590 separate customers who invested $46.3 million in DBSI.
In an Oct. 19 memorandum to the court, DeWaay's attorney Geoffrey Garner wrote that DeWaay lacks the funds to satisfy current claims in eight arbitration claims against it, and also to satisfy any potential claims from the estimated 304 potential customers who could still bring suit. If the claims proceed, DeWaay Financial Network would likely face bankruptcy.
Records show that more than 270 additional DeWaay investors have agreed to allow James Zazzali, once the trustee in a Chapter 11 reorganization of DBSI, to pursue claims against six brokerage firms, including DeWaay. The claims would be tied to a trust known as the DBSI Private Actions Trust.
DeWaay Financial Network officials say its injunction request is part of an overall strategy by the company to obtain a settlement with Private Actions Trust that would permit the company to move forward.
Lawyers for the plaintiff trust have agreed to support the injunction, court records show.
DBSI entities filed for bankruptcy protection in November 2008 as commercial and residential real estate values plummeted. The primary investments in the DBSI companies are tenant-in-common exchanges, higher-risk investment vehicles in which real estate ownership is split among two or more parties that have a fractional interest in the property. TICs became popular after the Internal Revenue Service ruled in 2002 that investors could defer capital gains on property transactions involving the exchange of real estate.
At least 17 brokerages -- all of them having participated in selling high-risk private placements -- have closed their doors since March 2010, according to an article in the Des Moines Register.
Other companies targeted by the trust along with DeWaay include Berthel Fisher Financial Services of Marion, Iowa; Independent Financial Group of San Diego; G.A. Repple & Co. of Florida; Girard Securities Inc. of San Diego; and JP Turner Company of Atlanta.
Court records show Berthel Fisher collected $5.5 million in commissions on the sale of 84 DBSI offerings, while DeWaay collected $3.6 million in commission on the sale of 31 offerings. The other companies collected a combined $2.6 million on DBSI sales.
The lawsuit claims that the investors in those offerings are entitled to recover losses because they were acquired from one or more of the broker defendants in what turned out to be nothing more than a classic Ponzi scheme that collapsed in November 2008. The lawsuit also claims that the brokerages sold investments in DBSI while failing to conduct adequate due diligence as each was required to do by law.
Among the claims, the lawsuit accuses each broker-dealer with violating federal law by making untrue statements of material fact in their sales offerings and omitting facts that were necessary to present an accurate statement of the investment.
In asking for an injunction against the investors claims, DeWaay Financial Network's lawyers offered a bleak picture for the company and any other investor attempting to recover losses.
"Defendant's meager remaining funds are dwindling quickly. Ongoing litigation costs will continue to rise over the coming weeks and months, as will the likelihood that a number of the other 304 other potential claimants will pursue individual claims before Finra or another tribunal," DeWaay's motion states.
DeWaay Financial Network's court filing last month disclosed that it only has $772,679 in net capital to cover losses. In its papers DeWaay officials said the company does carry insurance coverage, but its policy does not cover any of the pending or potential claims relating to the defendant's offer and sale of DBSI securities.