WILMINGTON, Del. (CN) - An Idaho law firm is accused of helping now-bankrupt real estate company DBSI fleece investors in a "massive scheme of corporate looting." DBSI Chapter 11 Trustee claims that Moffat Thomas Barrett Rock & Fields enabled DBSI to siphon hundreds of millions of dollars to insiders through complex tax avoidance - Tenants in Common arrangements.
Trustee James Zazzali claims that Moffat Thomas helped DBSI create and structure the so-called TIC syndication business, which failed to generate a profit, so "the insiders tried to prop it up with cash raised from new TIC syndication."
The federal complaint claims that Moffat Thomas gave "substantial aid and assistance" to DBSI insiders, who lured investors with false assurances that the investment vehicles were sound.
"Positive cash flow came only from new investor money, which was used to pay off old investors, a classic Ponzi scheme," according to the complaint.
After changes to IRS rules in 2002, DBSI was able to sell investors fractional interests in real estate to avoid capital gains taxes by becoming a "major syndicator of 1031 exchange properties," according to the complaint, which claims that DBSI sold more than $1 billion in TIC investments from 2003 to 2008.
"Much of DBSI's syndication of TIC properties was conducted through FOR 1031 LLC," an Idaho company controlled by insiders and DBSI, according to the complaint. FOR 1031 was used to "lure purchasers" through guaranteed rent proceeds via a master lease structure that used DBSI Master Leaseco, a DBSI entity, as the master tenant, which bore "whatever losses the TIC properties might suffer under the master lease structure," the complaint states.
Those TIC losses were "substantial," because "the real estate assets purchased by FOR 1031 and its subsidiaries were substandard, incapable of producing reliable revenue, financially insecure and generally 'toxic,'" according to the complaint.
FOR 1031 was insolvent by 2005, but was able to continue by using fictitious financial figures to show financial health, and Moffat Thomas advised DBSI in creating and structuring this master lease structure, according to the complaint.
Moffat Thomas also allegedly helped create "accountable reserves" for the DBSI companies to pay costs and expenses related to the properties over the term of the master lease, such as maintenance and improvements.
Collecting nearly $100 million in accountable reserves, DBSI commingled these and other funds to "satisfy cash needs at a particular moment," which found "their way into every corner of DBSI's massive, fraudulent operation," according to the complaint.
In 2008, the complaint states, "the world learned that this monolith was rotten to the core. Obligations to investors had outstripped receipts for years. 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."
It adds: "In November 2008, certain of the DBSI Companies filed for bankruptcy. Tens of thousands of investors learned that they had lost everything. The docket of the Bankruptcy Court is crowded with letters from individual investors telling of lost savings accumulated in some cases through the effort of generations. With this Complaint, the Trustee represents the victims of this fraudulent scheme - to prevent the Insiders and their aiders and abettors from enjoying the fruits of their wrongdoing and to force a reckoning with them to make good the harm that they caused. This complaint also seeks the recovery of sums paid to Moffatt Thomas that
constitute fraudulent transfers and/or are otherwise avoidable payments to them under the Bankruptcy Code and applicable non-bankruptcy law."
Former New Jersey Supreme Court Chief Justice James Zazzali filed this complaint and an earlier one against former DBSI insiders in his role as Chapter 11 trustee of the DBSI Estate Litigation Trust and DBSI Private Actions Trust.
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