The federal government is going after the same fallen mutual fund shop's chief again, this time with criminal charges.

Yesterday in Minneapolis at the U.S. District Court for the District of Minnesota, a grand jury indicted David Blaine Welliver on five counts of wire fraud, five counts of money laundering, and four counts of mail fraud over his actions in connection with the collapse of the Dblaine Fund. Welliver was CEO and chief investment officer of Buffalo, Minnesota-based Dblaine Capital [profile].

Dan Browning of the Minneapolis Star Tribune broke the news of the indictments. Welliver and his attorney both didn't responded to the paper's inquiries.

You're not imagining things if you think this case sounds like deja vu all over again. Welliver founded Dblaine in 2005, and in 2009 he launched the Dblaine Fund. In October 2011 the SEC filed a civil injunctive action against Welliver and his shop. Two months later, Welliver sued Dblaine's ex chief compliance officer, David Jones of Drake Compliance, accusing Jones of "utter failure to competently render compliance services."

In August 2013, at the end of the civil suit brought by the SEC, a federal judge ordered Welliver and Dblaine to disgorge $922,482.91 (including interest), and the SEC barred Dblaine "from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization."

Here's what happened, in the eyes of U.S. attorneys (per the indictment handed down yesterday). In 2010 (even as both Welliver and Dblaine had minimal cash on hand), Welliver struck a $100,000 deal to buy the assets of two other mutual funds, the Bryce Capital Growth Fund and the Bryce Capital Value Fund. Welliver borrowed money from a company called Lazy Deuce to do the deal, boosting the fund's assets to more than $9 million (from about $500,000).

Yet according to the indictment, Dblaine and Lazy Deuce's arrangement went beyond the Bryce Deal. The prosecutors claim Dblaine borrowed more than $4 million in total from Lazy Deuce, from October 2010 through May 2011. The idea, as Welliver allegedly portrayed it to the Lazy Deuce folks, was to buy more funds to merge into the Dblaine Fund. Yet beyond the Bryce deal, Welliver made no such acquisitions.

Welliver also stands accused of then having the Dblaine Fund invest $1.725 million into a shell company, Semita Partners, "formed by several Lazy Deuce principals." When the mutual fund faced heavy redemptions, Welliver sold its stock holdings but hung onto the Semita stake. Yet the Feds accuse Welliver of having the transfer agent send the fund's investors "materially false periodic account statements" estimating NAV at more than $11 per share when he allegedly knew the Semita stake was worthless. The fund collapsed in July 2011, and according to the indictment investors lost more than $1.2 million.

Along the way, Welliver allegedly used more than $500,000 of the Lazy Deuce loan money to things like: landscaping, land acquisition, and interior decorating for his home; a new personal vehicle; and paying his son's college tuition.

Another wrinkle that came to light several years ago is that, as Dblaine was buying the two Bryce funds' assets from Bryce Capital, Forte Capital was buying Bryce Capital itself. And Forte began redeeming client assets in the fund; by mid-January 2011, that $9 million in AUM had collapsed to about $2.5 million.

Five years prior to founding Dblaine, Welliver landed in legal hot water over money management. Per the Star Tribune's article, in 2000 the Minneapolis Police Relief Association and the Minneapolis Fire Fighters Relief Association won a $14.6 million judgement against Welliver. 

Edited by: Neil Anderson, Managing Editor


Stay ahead of the news ... Sign up for our email alerts now
CLICK HERE