A Nevada mortgage brokerage that raised capital by selling real estate investment funds to the public misled investors about the rate of return its funds achieved, according to a Securities and Exchange Commission investigation.
In a settlement, Vestin Mortgage Inc. and Vestin Capital Inc. have agreed to hire an outside consultant to review its sales materials for two years, and founder and principal Michael V. Shustek will pay a $100,000 civil penalty.
According to the SEC, Vestin has raised $560 million from investors since September 2000 in three separate funds. Most of the money was invested in short-term commercial real estate loans originated and serviced by Vestin Mortgage. While the first two funds initially earned investors 11 percent to 13 percent returns, after about two years the funds’ rate of return began to decline, in part because of an increasing number of nonperforming loans and foreclosures.
But Vestin continued to pay investors a return based on “anticipated cash flow,” which at times exceeded the actual rate of return generated by the funds. By paying investors more money than the funds were earning, Vestin eroded the unit value of the funds, with a corresponding decrease in each investor’s equity account, the SEC said.
In marketing the funds to investors between July 2002 and November 2004, Vestin did not disclose that past cash distributions to investors exceeded the actual rate of return, and were eroding the unit values of the funds. Vestin raised $196.3 million from investors during this period, the SEC said.
In a press release, Shustek said the company does not admit or deny the SEC’s findings.