Embattled investment adviser David Blaine Welliver received his sternest punishment yet on Wednesday when a federal judge delivered a five-year prison sentence for defrauding investors out of $1.725 million.
Welliver — the great-grandson of Val J. Rothschild, who in 1885 cofounded St. Paul’s oldest mortgage banking and real estate sales company — first ran into trouble soon after his financial advising career launched in the early 1990s. He lost a $14.6 million judgment awarded in 2000 to the Minneapolis Police Relief Association and the Minneapolis Firefighters’ Relief Association on allegations that he mismanaged fund assets.
His recent troubles trace back to 2010, five years after he founded Dblaine Capital using his Buffalo home address. Welliver agreed to pay another investment adviser $100,000 to acquire assets of two other mutual funds, even though Dblaine had less than $200 in liquid assets and Welliver had less than $2,000 in his bank account.
Welliver, 56, borrowed $4 million from the other advisory company, Lazy Deuce Capital Company, but used just $95,000 of that to acquire the assets of a mutual fund. Welliver diverted more than $500,000 to cover personal expenses: landscaping and interior decorating at his home, nearby land, a personal vehicle and his son’s college tuition.
He also admitted to using $1.725 million of Dblaine Fund investors’ money to invest in a shell company formed by several Lazy Deuce principals, called Semita Partners. On Dec. 31, 2010, Welliver liquidated nearly all of Dblaine Fund’s stocks to meet a series of redemption demands, and Dblaine’s only remaining holdings consisted of worthless Semita shares and cash held in a money market account.
Welliver pleaded guilty in July to a single count of securities fraud, almost a year after he was indicted on 14 federal fraud and money laundering charges. The agreement carried a fixed 5-year prison sentence. On Wednesday, Senior U.S. District Judge Paul Magnuson added three years of supervised release and ordered Welliver to pay restitution of more than $2.1 million.
“It’s been a difficult journey,” Welliver’s attorney, Paul Engh, said. “He’s more or less lived out of a car the last 18 months and is relieved that it is over.”
Welliver still owes the police and fire pension funds for the civil judgment. The funds sued him after learning that he had covertly worked as a fundraiser for Houston-based Technimar Industries Inc. while he was advising the funds to buy into the firm’s project to build a $35 million plant in Cohasset, Minn., near Grand Rapids, that would produce a composite building product called Stonite. Technimar collapsed without making the product.
Welliver also pleaded guilty to misdemeanor charges in 2003 for failing to file IRS employee benefit plan forms. The next year, he consented to a $19,161 judgment to settle a U.S. Department of Labor complaint that alleged Welliver transferred funds from his company’s retirement savings plan to his personal bank account.
The Securities and Exchange Commission sued Welliver in 2011, accusing him and his firm of “flagrant and numerous” securities violations. The SEC said Welliver paid himself a six-figure salary despite Dblaine Capital having just a handful of clients with about $500,000 in assets under management and generating less than $7,000 a year in fees as its only revenue. The U.S. Postal Inspection Service, the FBI and Internal Revenue Service’s criminal investigation branch investigated the case.