A husband and wife in their 70s recently won the largest DBSI-related arbitration award to date – $1.6 million – in a claim filed against QA3 Financial Corp, according to a Jan. 23 InvestmentNews article (“QA3 hit with $1.6M award for sale of TICs to elderly couple”). The FINRA arbitration panel that heard the claim said QA3 failed to “adequately supervise” the broker who sold the tenant-in-common exchanges to the couple.
DBSI, an Idaho-based, real estate investment company that specialized in acquisitions and development, filed for bankruptcy a little over two years ago (“DBSI, a real estate company, files for bankruptcy,” Reuters, Nov. 10, 2008). At the time, the company said it had up to 5,000 creditors, many of whom were individual investors with money tied up in the company’s properties.
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From approximately 2005 through Nov. 2008, DBSI was a major packager of the hugely popular tenant-in-common (TIC) real estate investments (“Brokers’ DBSI commissions targeted,” Star Tribune, Nov. 24, 2010). The investments allowed multiple investors to pool their money to buy shares in an investment property. When the housing market crashed, the profits evaporated. It was alleged that DBSI sold over-priced properties to investors and used the profits from the inflated sales to pay dividends to previous investors, rather than paying dividends based on actual rent-related profits. After DBSI filed for bankruptcy, a number of investors filed claims against the broker-dealers who sold the DBSI-packaged TICs.
According to data released by InvestmentNews, QA3 Financial Corp. generated $5,455,000 in commissions from the sale of TICs from DBSI. As reported in the Jan. 23InvestmentNewsarticle, QA3 hinted last year that it may be facing bankruptcy due to a dispute with its insurance carrier, Catlin Specialty Insurance Co., over liability and legal fees related to QA3’s sale of high-risk private placements.
The FINRA award is an “interim” award, which means FINRA will retain jurisdiction over the claim for up to 180 days while the transactions between QA3 and the couple are unwound and analyzed.
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