"This is purely an economics story, and we got on the wrong side of it. Whether we survive is up to our clientele, and they are showing resolve and unbelievable support for us. They believe in what we do. A few clearly don’t." – Don DeWaay, founder, DeWaay Capital Management Inc.
"This is purely an economics story, and we got on the wrong side of it. Whether we survive is up to our clientele, and they are showing resolve and unbelievable support for us. They believe in what we do. A few clearly don’t." – Don DeWaay, founder, DeWaay Capital Management Inc.

For more than 27 years, Don DeWaay worked his way through the financial services industry with barely a blemish.

Today, he is a man with a target on his back.

“It’s killing me,” DeWaay said during a recent interview in a conference room in the lodge-like Clive headquarters of DeWaay Capital Management Inc. and its plethora of affiliated businesses.

It is a room with a view. Look out those windows and the landscape is littered with properties drained of value by the collapse of credit and real estate markets in 2008. Lots of big ideas with promises of future wealth fed by easy money from banks and other lenders. These days, banks and lawyers and bankrupt developers work out the disposal of some of those properties.

Real estate is playing out in a personal and professional drama for DeWaay.

In 2006, he formed the broker-dealer DeWaay Financial Network LLC (DFN). Its chief business is direct private placements in various classes of securities. A large category of those fall into what are called alternative investments – real estate, equipment leases, oil and gas leases, and others.

They’re candy on a stick when, in the example of real estate, income-producing assets can be bought at a discount. Think of a foreclosed office building with tenants. And they are even more enticing when their values escalate. Think again of real estate leading to the Great Recession.

In the last two years, they have become a problem for DFN and, by extension, all of DeWaay’s financial planning businesses.

For a man who says his successes have been built on a “squeaky clean” reputation and a long record of investment successes, the recent years have been humbling.

“We built the firm not on failure but on referrals,” he said. “People had widespread success. We have gone from an 8-by-10 basement office to what we have today.”

What he has today, at least in regards to DFN, is shrinking, according to court documents.



In the courts

The broker-dealer is one of several brokerages targeted in a federal lawsuit in Delaware that seeks to recover investments and commissions from companies that sold private placements for Diversified Business Services & Investments Inc. (DBSI), an Idaho company that sought investors for its many real estate holdings.

It courted broker-dealers such as DeWaay Financial Network to bring investors to the table, typically as tenant in common holders of a fractional share of the investment. DBSI filed for bankruptcy protection from creditors in November 2008 and its bankruptcy court trustee filed a lawsuit in July 2011 seeking to recover those investments.

DBSI raised $1 billion from the independent broker-dealers, who were offered commissions and fees of 8 percent to make the deals. According to a court filing, DFN sold $46.3 million in investments to 590 clients.

DFN said in a court filing that if it is forced to arbitrate claims against it, it could go out of business. At the time of the filing in October 2011, the company said it had assets of $3.4 million and $772,679 in working capital.

It also said it had paid $750,000 in claims on investments and sought to avoid arbitration before the Financial Industry Regulatory Authority on claims that could cost it $4 million damages and fees.

In addition, DFN has asked for class certification for all of its DBSI investors as a means of reaching a broad settlement. That motion is pending in U.S. District Court in Delaware.

Also in that case, seven investors have notified the court that they have either settled their claims with DFN or no longer seek to force arbitration.

On Jan. 9, an attorney for Wayne and Edeltraut Edgerton of Texas, Dean and Sharee Costlow of Winterset and Ronald and Judy Peterson of Waukee told the court that his clients were dropping their efforts to force arbitration on their claims.

That same day, they filed a lawsuit in Decatur County District Court in Leon seeking class certification for all of DeWaay’s clients in the DBSI investments.

On that same day, DFN clients Gordon and Dixie Mosher of Leon and Philip and Janet Metcalf of Huxley filed a lawsuit in Decatur County District Court seeking class certification for anyone who invested in 66 direct private placements offered by the firm, including several that have not paid “investors one dime of interest or dividends.”

Both lawsuits accuse DeWaay, DFN, DeWaay Capital Management Inc. and DFN Partners LLC of violating the state’s uniform securities act by failing to advise clients of the risky nature of their investments, failing to carry out due diligence and not disclosing adverse facts about the investments.

Among the investments identified in the Mosher and Metcalf lawsuit is an $8 million offering in DFN Partners LLC, which sold in 80 voting units at $100,000 each.



DeWaay on the defense

“We disagree with the premise of negligence,” said DFN President Matt Stahr.

The company has not determined how it will react to the filings in state court, but Stahr pointed out that DFN is seeking class certification in federal court as a way to reach an equitable settlement.

It is not surprising that Don DeWaay considers all of the charges an attack on his reputation.

“We feel terrible about it,” he said. “It just kills you when you read the kind of stuff that you read. We’ve been committed to helping people through the process.”

DeWaay said that his companies were not called in arbitration hearings before the Financial Industry Regulatory Authority until markets began to collapse and people started to lose money on their investments.

“When people come in the door here, they’ve never felt pressured to do anything,” he said. “I think that’s why our client retention has been high. We give them time to make decisions. People tend to have selective memory looking in the rear-view mirror.

“You tell them there’s risk, and they sign off on the risks. You’re not hiding the ball from anyone. I can’t make guarantees; it’s illegal for me to do so. … We’re doing everything we can to gauge each one of those projects.”

The company has about 2,400 clients, and has lost few as a result of the court cases.

“This is purely an economics story, and we got on the wrong side of it,” DeWaay said. “Whether we survive is up to our clientele, and they are showing resolve and unbelievable support for us. They believe in what we do. A few clearly don’t.”



What the future holds

DeWaay is optimistic that his companies can survive the turmoil of recent months.

“You can’t take 28 years and have widespread success and a couple years that define failure and throw the whole thing out,” he said.

DeWaay noted that his companies have placed $47 million in investments with Iowa companies.

His companies have helped people build and maintain wealth.

“The view is that we are taking advantage of the elderly by selling high-risk investments and knowingly steering people in the wrong direction,” he said. “It’s categorically the opposite.”

DeWaay said that he continues to believe in alternative investments as part of a diverse investment strategy.

In the future, the company will make a greater effort to control the investments it recommends, he said.

But he isn’t throwing in the towel.

“DeWaay Capital Management will go on one way or another, and I believe DFN will continue to do good things and better. Philosophically, we still believe in what we do,” he said.