SEC.gov | SEC Charges Real Estate CEO With Defrauding Investors

The Securities and Exchange Commission today announced securities fraud charges against recidivist Michael Shustek, the CEO of several Las Vegas real estate investment trusts (REITs), and his wholly owned investment advisory firm, Vestin Mortgage LLC.

The complaint alleges that since at least 2012, Shustek fraudulently enriched himself and one of the REITs he controlled, The Parking REIT, at the expense of two publicly traded REITs that he earlier had founded, Vestin Realty Mortgage I (VRTA) and Vestin Realty Mortgage II (VRTB). According to the complaint, Shustek drained $29 million from VRTA and VRTB in order to funnel the money into The Parking REIT and later directed VRTA and VRTB to enter into a series of money-losing transactions in which the same six buildings were repeatedly re-sold, all to benefit himself and The Parking REIT. The complaint also alleges that Shustek deceived the boards of directors of VRTA and VRTB—and violated his fiduciary duties to those companies—in two separate securities transactions to get the companies to pay him almost $10 million. Finally, the complaint alleges that Shustek repeatedly misled investors by causing VRTA and VRTB to make false and misleading statements in their public filings, which hid his self-dealing.

"REIT executives have a responsibility to be forthright with investors about how their money is being spent," said Erin E. Schneider, Director of the SEC's San Francisco Regional Office. "As we allege in our complaint, Shustek deceived the REITs' boards of directors and shareholders to hide his repeated misuse of their assets to benefit himself."

The SEC's complaint, which was filed in the District of Nevada, charges Shustek and Vestin Mortgage with violating the antifraud provisions of the Securities Act, Exchange Act, and Advisers Act, and seeks disgorgement plus pre-judgment interest, penalties, permanent injunctions, and industry, penny stock, and officer and director bars against Shustek.

The SEC’s investigation was conducted by Ruth Hawley and supervised by Jeremy Pendrey and Monique C. Winkler, and the litigation will be conducted by Ms. Hawley, Marc Katz, and David Zhou, and supervised by Susan LaMarca, all of the San Francisco Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority.

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Tips on setting up a private equity fund

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It can be quite intimidating for new investors to set up their own private equity fund.  In fact, even those that have been in industry for years understand that the entire process leading to profit can become more complex, longer, and more expensive than expected.  But preparing in advance and keeping to certain key pointers should aid immensely in preventing these hitches, says investment professional Tyler Tysdal. 

It’s all about developing a defined approach or strategy, which begins with knowing if the investment in question is in demand among investors and whether your team can manifest a good track record in it.  A lot of investors nowadays are on the lookout for co-investment options, but you have to know clearly if such will be offered, to whom, and at what cost. 

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Secondly, you have to understand that raising a new fund can take several years, so the initial goal is to have sufficient funds to make it through that period and ensure that your team is on board for the long haul.  Gather a team of like-minded colleagues with clearly assigned roles and who are willing to work for years with one another, as your group’s track record will convince investors of your capability to deliver positive results. 

Keep in mind that your team must be keenly aware of the challenges inherent to the fund-raising process; it can take a plethora of meetings before the influx of initial funds.  Also, consider closely the fund structure: is it going to be corporate, listed, unlisted, or a partnership?  While the investor type often dictates this, it would do you well to keep your investment structure as simple as possible.  Seeking advice from various industry experts at the onset is key, explains Tyler Tysdal.

Private equity and real estate investor Tyler Tysdal began his career in investment banking with Alex Brown & Sons. He graduated from Georgetown University with a BSBA in Finance and obtained his MBA from Harvard Business School. For similar reads, visit this blog.