BOISE (CN) – The court-appointed trustee for the collapsed DBSI Realty and affiliates claims in court that the company’s general counsel, Mark Ellison, was involved in a massive Ponzi scheme that made $80 million disappear.
Trustee James Zazzali says his federal complaint against Ellison is the result of years of work examining the company, which filed for Chapter 11 bankruptcy in November 2008.
Zazzali, trustee for the DBSI Estate Litigation Trust and for the DBSI Private Actions Trust, claimed he uncovered a “tale of deception, venality and self-dealing.” His 25-count, 139-page complaint includes allegations of state and federal RICO violations, securities fraud, conspiracy, and legal malpractice.
“The DBSI Companies presented to the world the illusion of a monolith of wealth, competence and power,” the complaint states. “Investors were told of substantial commercial real estate holdings throughout the country, of a history of successful and sophisticated real estate ventures, of assets into nine figures and that no investor had ever lost money on a DBSI investment.”
Actually, Zazzali says, DBSI was running a classic Ponzi scheme in which it “robbed Peter to pay Paul.”
The company, founded by Ellison and his college friend Douglas Swenson in 1979, used Money from new investors to pay back older ones, the trustee says.
Ellison, who has a background in accounting and law, became a member of the board of directors and acted as DBSI’s outside counsel after he left to work at a law firm in 1992, according to the complaint. He returned as general counsel in 2004. By then, Zazzali says, DBSI was already defrauding investors, targeting smaller commercial real estate companies, “to share in complex tax avoidance transactions and to purchase bonds, notes and interests in entities engaged in major real estate development projects.”
When the truth surfaced, Zazzali claims, investors across the globe learned “that this monolith was rotten to the core.”
“Obligations to investors had outstripped receipts for years,” the complaint states. “The edifice was supported by hundreds of empty or half-formed entities that passed assets back and forth to create the impression that it could keep its promises to investors. Assets were not as represented. Positive cash flow came only from new investor money, which was used to pay off old investors, a classic Ponzi scheme. Investor funds that were supposed to be reserved for specific purposes, the accountable reserves, were immediately commingled with other funds and the accountable reserves alone represent over $80 million in missing funds.”
Zazzali claims that Ellison played a crucial role in the scheme, and that he and other insiders collected millions of dollars from investors and by channeled their money into losing investment such as start-up tech companies, “generating tax losses that a number of insiders took for themselves.”
“Thus the insiders avoided even paying taxes on the funds they misappropriated. Indeed, these individuals treated the entire DBSI operation as their own alter ego, hiding behind a complex screen of corporate entities to perpetrate their fraud,” according to the complaint.
Zazzali demands judgment on all 25 counts, plus costs and fees.
His lead counsel is Keely Duke, with Duke Scanlan & Hall, of Boise.