In September 2008, Anne Dykstra decided to celebrate her 70th birthday the best way she could imagine -- by retiring. The longtime educator from Golden Valley decided she could live on her pension, Social Security and $1,800 a month from an obscure form of real estate. The next month, Dykstra got a letter announcing the monthly real estate checks would no longer arrive. More than half her income was gone. Suddenly Dykstra had a new job -- trying to salvage her retirement.

Dykstra is one of about 500 Minnesotans and 8,000 investors nationwide whose finances have been ravaged by the collapse of DBSI Inc., an Idaho company that specialized in supposedly worry-free real estate investments. Investors like Dykstra bought a small piece of an office building or shopping center from DBSI in exchange for "guaranteed" annual returns of 6 to 10 percent, depending on the property.

With cash from these investors, DBSI assembled a portfolio of more than 240 properties nationwide, worth an estimated $2.6 billion. But last fall, the private company abruptly stopped paying investors and filed for bankruptcy. Thousands of people, many of them retirees, found themselves paying lawyers and dealing with far-flung properties they knew little about.

DBSI said it's merely a victim of the declining commercial real estate market. But in January, securities regulators in Idaho filed a lawsuit accusing the company of fraudulently misleading investors. Last month, an investigator hired by the bankruptcy court concluded the company was in financial trouble as early as 2004 and stayed afloat with an "elaborate shell game" in which new investors paid off the company's existing obligations.

Some industry experts say federal regulators were slow to heed warnings that companies like DBSI were peddling these investments, called tenants-in-common (TIC), without adequately disclosing their risks. By 2007, when the U.S. Securities and Exchange Commission finally prodded DBSI to treat these deals like securities, it was too late for thousands of investors like Dykstra.

"We knew about this DBSI thing and were trying to stop it," said Renee Brown, a Minneapolis securities dealer whose industry group complained to the SEC back in 2005. "The SEC was nowhere."

SEC spokesman John Heine said no one at his agency was prepared to discuss regulation of DBSI or tenant-in-common investments.

Exploiting a loophole

TICs, the little-known investment that proved DBSI's downfall, involved selling little pieces of commercial property to lots of investors. A single office building, for example, could be owned by 20 or more individuals, each of whom would receive a deed for their percentage. DBSI would buy the property and flip it to the TIC investors at a markup, from 20 to 40 percent.

In exchange, DBSI managed the properties by hiring asset managers, collecting rents and paying the bills. All investors had to do was cash their monthly checks, which were guaranteed to keep coming no matter how many tenants moved out of individual properties. The size of the check was pegged to the size of their investment, not the property's income stream.

DBSI's business took off in 2003 after the Internal Revenue Service ruled that investors could avoid capital gains taxes by rolling over proceeds from property sales into a TIC investment. That appealed to many investors who were tired of dealing with the hassles that came with being a landlord.

Over the next five years, retirees and other investors poured an estimated $1 billion into DBSI. Salespeople were instructed to brag that none of its investors had ever lost money.

Few investors knew of the brewing controversy between real estate professionals and securities dealers over how these investments should be regulated. Securities dealers wanted regulators to classify TICs as securities, which would give the government more oversight and force companies like DBSI to provide more financial information. Brown said the move met strong resistance from the National Association of Realtors, which said its only concern was making sure real estate professionals remain involved in the transactions.

Patricia DelRosso, a securities dealer in Chicago, said her group urged SEC officials to investigate the practices of DBSI and other companies peddling tenant-in-common products as real estate.

"The feedback I felt I was receiving, from the SEC side, is that they seemed to be very reluctant to do that, because of the potential liability that would come back to them," DelRosso said.

In the fall of 2007, under pressure from SEC regulators, DBSI started marketing its tenant-in-common investments as securities. The ruling slowed DBSI's business, but it continued making deals. Later that year, for instance, the company bought the Landmark Towers office building in downtown St. Paul for $26 million.

But the company picked too many losers. DBSI's portfolio was filled with problems: major tenants at the end of their leases, long deferred maintenance and ballooning debt payments. Those problems caught up with the company last year, when DBSI filed for bankruptcy. Three-quarters of its highly leveraged properties were losing money, and DBSI was bleeding $8 million a month.

"They just didn't use sound investing principles when they acquired all these investment properties, and it killed them," said Paul Mangiantini, a lawyer in Boise, Idaho, who represents a group of DBSI investors suing the company.

The bankruptcy investigator reported last month that the company commingled funds, distributed money to insiders and squandered millions on side businesses in a failed effort to diversify. Properties were mortgaged for more than they are worth. Millions of dollars set aside for property maintenance is gone.

"I never guessed or suspected there was fraud," Dykstra said. "These guys are thieves. Anybody can get mugged. That's what this is."

Former company owner and president Douglas Swenson denied accusations of mismanagement, arguing through his lawyers that he tried to save the company, not loot it.

Dykstra is frantically trying to salvage her $525,000 investment in office buildings in Tennessee, North Carolina and Indiana. She has visited each property, at her own expense, and taken the lead in organizing DBSI investors, who have hired a lawyer and succeeded in getting the three properties out of the bankruptcy case.

But it's an uphill battle. One property has already gone into foreclosure, and another building is "teetering" because its rents might not cover mortgage and other costs.

The troubled investment has forced Dykstra to cancel a long-term care insurance policy and cut back on visiting relatives. She doubts she'll have any money to leave her seven grandchildren.

"I want my investment back," Dykstra said. "I want some justice done for people who are in even worse straits than I am. I want greater regulation. I want our government to pay attention to what this does, both in terms of the trust in our financial system, but also in the actual devastation it causes in a community."