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Award Date: March 1, 2024
Claimant Representative: Dochtor Kennedy, MBA, J.D.
Respondent Firm: QA3 Financial Corp.
Case Objective & Summary:
This Virginia-based Advisor with over 23 years of industry experience had a sole disclosure on his public BrokerCheck record. Seeking to reinstate his perfect records, he hired AdvisorLaw to support him in seeking the expungement of the claim through FINRA Dispute Resolution.
Summary:
Before 2008, Diversified Business Services and Investments, or “DBSI,” was an investment sponsor corporation that purchased and managed commercial properties and offered investment opportunities in both tenant-in-common (TIC) investments and real estate investment trusts (REITs). For decades, DBSI maintained a solid track record of growth and performance.
Around 2005, the advisor recommended an investment in DBSI to a customer, as part of a balanced and diversified portfolio. The customer liked the recommendation and purchased the DBSI investment. In connection with it, the customer received, reviewed, and signed numerous disclosures.
In November of 2008, at the height of the economic crisis at that time, DBSI filed for Chapter 11 bankruptcy protection. The bankruptcy examiner spent 14 months looking into DBSI and its books and records, and DBSI was found to be a Ponzi scheme.
In August 2014, DBSI founder and CEO, Douglas Swenson, was sentenced to 240 months in prison for violations of securities fraud. He was subsequently, permanently barred by the SEC. Mark Ellison, who had served as DBSI’s general counsel, was sentenced to 60 months in prison for his part in the fraud. The court found that Swenson and Ellison were responsible for losses of more than $100 million and that there were 250 victims of the fraud.
Due to the sheer magnitude of the DBSI scandal, a private actions trust (PAT) was formed, and its trustee filed actions, on behalf of the customers who were defrauded by DBSI. The actions named firms, registered representatives, and anyone else who had been involved in selling DBSI securities. As a result, broker-dealer firms and advisors suffered from the effects of DBSI’s fraud, along with the investors.
In early 2015, a customer dispute by the customer to whom this advisor recommended DBSI was reported to the advisor’s records, alleging common law fraud, negligence, breach of fiduciary duty, and constructive fraud. After the trust’s actions were dismissed twice by the courts, the customer filed a third action. While the case listed no specifics regarding the advisor himself, the firm settled with that customer for $10,000, and the advisor ended up with a disclosure staining his otherwise spotless record.
Result:
At the hearing, the FINRA Arbitrator listened to the advisor’s testimony and the arguments in favor of expungement that were presented by Dochtor Kennedy, MBA, J.D. He reviewed the advisor’s BrokerCheck report, the settlement agreement, and copies of the claims filed by the customer.
The Arbitrator noted that the original complaint “…outlines DBSI company and sales practices and deficiencies but does not identify any particular sales, dates, or times of sale, or any other interactions between [the advisor] and the PAT members named [(including the customer)], nor does it contain any direct allegations or statements of fact for them.” He also specifically noted that the original complaint “also contains in its Factual Background section over 50 pages concerning how DBSI structured its company and offerings to make their procedures of, at least in part, using new investments to pay returns on early investments, effecting a Ponzi scheme.”
The advisor testified at the hearing that the firm “had indicated to him that they had completed due diligence in investigating DBSI and had approved their products for sale” and that the advisor “indicated that he, too, had conducted his own due diligence concerning DBSI products before offering them to his clients.”
The Arbitrator reviewed the allegations listed in the disclosure and stated that, “To find each of these allegations to be true the Arbitrator believes it must be established that [the advisor] knew, or should have known, many, if not all, of the facts detailed in over 50 pages of the Complaint.” He found the advisor’s testimony convincing and indicative of the fact that “he had no actual knowledge of the Ponzi scheme.” Although the complaint alleged that the advisor should have been aware of DBSI’s scheme based on its listing of certain facts, the Arbitrator felt that “the sheer number and complexity of those facts (including details of internal accounting and alleged ‘countless red flags’ contained in DBSI offering documents), and the scope and length of the bankruptcy examiner’s 14-month-long investigation through which they were revealed, argues strongly and convincingly that knowledge of these facts cannot be attributed to [the advisor] at a time of sale before the bankruptcy proceedings.”
Accordingly, the Arbitrator found the claims to be false and recommended expungement of the disclosure — resulting in a soon-to-be, completely clean public record for this advisor.
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