Former adviser to pension funds says compliance expert let him down.
Embattled financial adviser David Blaine Welliver went on the offensive Tuesday in a new federal lawsuit that blames his former chief compliance officer for problems that got him in trouble with federal regulators this year.
The U.S. Securities and Exchange Commission sued Welliver in October, accusing him of fraud and "flagrant and numerous" securities violations in a 2010 investment deal involving his advisory firm, Dblaine Capital, and a mutual fund he'd created.
The SEC alleges that Welliver sank substantial investor assets into an "alternative investment" that ultimately proved worthless, misrepresented the value of the investment, violated the mutual fund's lending restrictions and spent $500,000 on personal items that included a $40,000 new car, his son's college tuition and back taxes.
On Tuesday, Welliver, 51, of Buffalo, responded with his own lawsuit, in which he accuses his former chief compliance officer, David D. Jones, of the Woodlands, Texas, of an "utter failure to competently render compliance services" to him and his firm.
The suit alleges that Jones and his firm were negligent and breached their fiduciary duties and contracts. Welliver seeks to have Jones and his firm indemnify him and Dblaine Capital from the SEC's legal actions, plus unspecified monetary damages.
In an interview, Jones said that he hadn't seen the lawsuit and couldn't comment on specific accusations. "He's blaming me for his thievery and frauds ... since I'm the one who turned him in to the SEC," said Jones, a principal in Drake Compliance, a consulting firm. "The SEC investigated this matter thoroughly, including my actions as the chief compliance officer," he said.
"There are several paragraphs in the SEC's action against Welliver wherein the SEC states, in some detail, the actions as chief compliance officer that I took to attempt to head this off. And at every opportunity, David Welliver prevented me from doing so," Jones added.
The SEC's lawsuit, filed in St. Paul, says that Welliver has a history of "misconduct" in the financial services industry. The Minneapolis Police Relief Association and the Minneapolis Fire Fighters Relief Association won a $14.6 million judgment against him in 2000 on allegations that he mismanaged fund assets.
Welliver founded his advisory firm, Dblaine Capital, in 2005, and the mutual fund, Dblaine Fund, in 2009. Jones signed on as compliance officer in February 2010 and resigned in June 2011.
The SEC says Welliver arranged a merger with other mutual funds in March 2010 and needed $200,000 to complete the deal. But by the end of June 2010, his firm had less than $10,000 in liquid assets.
So in October 2010, the SEC says, Welliver had Dblaine Capital enter into a financing agreement with a Burnsville lender called Lazy Deuce Capital Co. Regulators say Welliver agreed to invest the mutual fund's assets in "alternative investments" selected by Lazy Deuce in exchange for short-term, high-interest loans to Dblaine Capital.
Dblaine Capital borrowed $4 million from Lazy Deuce and pulled off a merger, increasing assets to $9 million, the suit says. In return, it says, Welliver and Dblaine Capital had the mutual fund invest in a private placement offering by Semita Partners, a commercial lender founded in August 2010 by several principals in Lazy Deuce. In fact, the investment was transferred to Lazy Deuce and distributed to its shareholders, the SEC says.
Welliver's lawsuit says that Jones never suggested that the arrangements were improper or illegal.
Dan Browning • 612-673-4493