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Rating:A Defunct Fund's Chief Sues His CCO Not Rated 5.0 Email Routing List Email & Route  Print Print
Wednesday, December 21, 2011

A Defunct Fund's Chief Sues His CCO

News summary by MFWire's editors

A mutual fund chief under fire just took the fight to his former chief compliance officer. Yesterday David Blaine Welliver and his mutual fund firm, Dblaine Capital [profile], filed suit against Dblaine's ex-CCO, David Jones of Drake Compliance.

The Minneapolis Star Tribune's Dan Browning reports on the new suit.

In October the Securities and Exchange Commission (SEC) filed a lawsuit in the U.S. District Court of Minnesota, accusing Welliver of a making an improper agreement for the now-defunct Dblaine Fund, of investing its assets into an inappropriate "alternative investment" and more [see MFWire.com, 10/19/2011].

Now, Welliver and Dblaine are accusing Jones of breach of contract, breach of fiduciary duty and negligence, with a lawsuit filed in the same federal court. Welliver blames Jones for the SEC's suit, for Jones' "utter failure to competently render compliance services to Dblaine Capital."

"Mr. Welliver feels let down by David Jones, who earned a lot of money from Dblaine," Jamie Masella of Blank Rome, who is representing Welliver, told MFWire.com -- according to Welliver's complaint, Dblaine paid Jones "nearly $100,000" over the course of about 16 months. "Mr. Welliver looks forward to prevailing in this litigation and proving himself innocent of the allegations that have been made against him."

In response, Jones pointed to the SEC's original complaint, which he described as outlining his many attempts to prevent the actions for which the SEC is attacking Welliver.

"I haven't seen a lawsuit," Jones told MFWire.com. "It would be completely inappropriate for me to comment."

A Deal ...

Welliver, an alum of Dean Witter Reynolds and Welliver Rothschild Investment Advisers, founded Buffalo, Minnesota-based Dblaine in 2005, serving as CEO and chief investment officer and working with individual clients. He launched the Dblaine Fund in late 2009, taking the reins as PM. In February 2010, Jones signed on as CCO for Dblaine Capital and the Dblaine Fund.

Welliver wanted to kickstart the growth of the new fund's AUM. In December 2010, Dblaine paid Bryce Capital $95,000 up front -- after paying $5,000 for initial consideration and agreeing to shell out $200,000 in total -- to merge the Bryce Funds into the Dblaine Fund. The deal single-handedly boosted the Dblaine Fund's assets by about 2400 percent to $9 million, from $350,000.

... And a Deal Within a Deal ...

To finance that deal, Welliver turned to Lazy Deuce, a firm specializing in "non-traditional funding for a variety of businesses and purposes." From October 2010 through May 2011, Lazy Deuce lent Dblaine about $4 million. In exchange, Lazy Deuce wanted to divert a portion of the Dblaine Fund's assets (initially five percent) into investments recommended by Lazy Deuce.

So, according to Welliver's 34-page complaint, after the Bryce deal he followed Lazy Deuce's recommendation. In December 2010 Welliver invested $900,000 of his fund's $9 million in assets into a private placement with Semita Partners. Then Forte Capital, which had negotiated a deal to buy Bryce Capital even as Dblaine negotiated the Bryce Funds' merger into the Dblaine Fund, began redeeming its clients' assets in the Dblaine Fund.

Redemptions Bite

Those redemptions pushed the Dblaine Fund's assets down 72 percent to about $2.5 million by mid-January 2011.

To meet redemptions he sold many of the fund's large cap holdings rather than the illiquid Semita investment, according to Welliver's complaint. Welliver claims that Lazy Deuce offered to refer about $10 million into the Dblaine Fund, only to withdraw that offer after the fund pumped another $775,000 into Semita in April 2011.

Then in May, according to Welliver's complaint, two Lazy Deuce executives told Welliver that the Dblaine Fund was Semita's only investor. Thanks to the redemptions and accompanying performance woes, the Semita investment was taking up an increasingly large portion of the fund's portfolio. And that investment's value subsequently went to zero.

The SEC Steps In

Jones resigned as Dblaine's CCO in June of this year and went to the SEC. In October the SEC attacked Welliver over the Lazy Deuce deal and the Semita investment, and the subsequent diversification and valuation issues in the Dblaine Fund. The SEC claims that Welliver even paid himself a six-figure salary in 2010, despite Dblaine claiming less than $5,000 in fees for the year.

Welliver, in turn, now accuses Jones of failing to provide warning about potential violations, despite his duty as CCO, but that's not all. In his complaint, Welliver accuses Jones of personally approving the Lazy Deuce loans and the Semita investments.

In the complaint, Welliver asks the court to force Jones and his company to pay unspecified damages and lawsuit expenses, to cover Welliver's defense against the SEC and more.

The Dblaine Fund itself did not survive in time for the courtroom fights. The fund's board liquidated the fund's remaining $54,000 in assets in August, distributing them to the 80 shareholders. 

Edited by: Neil Anderson, Managing Editor

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