Del Mar chief: State overreacted in seizing mortgage firm

Monday, Feb. 15, 1999 | 11:01 a.m.

Mike Shustek was clearly uncomfortable Friday standing in the parking lot in front of the Las Vegas suite that houses Del Mar Mortgage Inc.

Shustek couldn't go inside the office of the business he founded more than four years ago and was treading in unfamiliar water by reading from a carefully crafted statement reviewed by lawyers and public-relations professionals.

Outgoing with the media in the past, Shustek was reduced to reading a six-paragraph statement and offering four written responses to allegations made by the state against his company late last week.

The state Department of Business and Industry's Financial Institutions Division ordered Shustek, president of Del Mar Mortgage and the affiliated Del Mar Holdings Inc., out of the office when it seized control for alleged misconduct, including concealing information from investors.

Meanwhile, inside the office, Frank Ellis, an attorney for Las Vegas certified public accountant George Swarts -- who was named conservator of the business -- explained what his client will begin doing this week.

Swarts will issue reports to each investor explaining the status of his investment. Then, by state law, he has 60 days to remedy the situation. Financial Institutions Commissioner Scott Walshaw could then request that a receiver be appointed by District Court.

Walshaw, who was not in his office late last week because of a family emergency, issued a statement on Friday.

"Although the alleged operational deficiencies are serious," the statement says, "I believe they can be resolved if proper management practices are followed. The case does not involve the severity of misconduct found in the Harley Harmon Mortgage case, but state law requires this type of action when circumstances warrant."

Walshaw was making reference to a notorious mortgage investment case that began in December 1997 when the Financial Institutions Division closed down Harley L. Harmon Mortgage Co. In that case, hundreds of investors stand to lose millions of dollars.

The state came under criticism for not moving quickly enough to minimize the damage to investors in the Harmon case. The state Legislature is expected to tighten the regulation of mortgage companies that handle private investments with legislation expected to be debated in the current session.

Last month, Assemblyman David Goldwater, D-Las Vegas, took testimony as chairman of the Legislative Commission's Subcommittee to Investigate Regulation of Mortgage Investments. The panel was urged to give state regulators broader authority to criminally prosecute and fine lawbreakers.

Although Shustek didn't address specifics in the statement he issued, it's clear that he feels the backlash from the Harmon episode is what's behind the state's action. And the fact that Walshaw's statement says the Del Mar matter isn't as serious as the Harmon case indicates the state is at least thinking about it.

"We want to assure the community and our investors that Del Mar Mortgage is continuing its full operations and that all our customers' money is safe and accounted for," Shustek said in his statement. "We believe the Financial Institutions Division is overreacting and the issues they have raised are technical ones that do not put any of our investors' money at risk.

"I want to emphasize that we are cooperating fully with the Division and expect these issues will be resolved quickly. The bottom line is the Del Mar Mortgage is safe and sound and will continue to operate through its dedicated employees, under the temporary administration of the overseer appointed by the Division.

"Del Mar Mortgage has been providing safe and sound financial services for more than four years. In that time, the company has written more than 1,000 loans worth more than $800 million. Of greater importance, though, is that investors have never lost one cent nor have they ever received less than their agreed-upon return," the statement said.

"Del Mar's loans provide a valuable and timely service in helping this community grow by offering short-term loans to respected local commercial and residential developers."

What seizure order says

The state order taking possession of Del Mar, signed by one of Walshaw's administrators on Thursday, specifically bans Shustek from the premises but allows his employees to continue to work. Walshaw's statement said he hopes Swarts will be able to operate the business with as little disruption as possible to existing investors.

The state order also specifies the allegations:

* Del Mar is accused of violating an agreement with the Division of Financial Institutions that requires it to handle trust accounts or investor funds only through its mortgage-company operation or through an independent escrow agent.

* The company is accused of not disclosing information to investors or providing information that is false or misleading. The order cites a $4 million loan listed as a second trust deed. The summary form provided to investors does not reflect it as a second and doesn't reflect the first lien of $9 million.

"As a result, the stated loan-to-value ratio is incorrect. In addition, the summary forms for the first and second trust deed loans reflect different estimated values," the order says. "Several other loan transactions reviewed contain lender summary disclosure forms containing similarly incorrect and misleading information."

* Several construction projects funded by Del Mar have gone into default, have developed problems or extensions have been sought, the order says. Del Mar failed to inform investors on those matters and, in many cases, Shustek's Del Mar Holdings Inc. made interest payments on defaulted loans.

"Del Mar Holding appears to be obtaining its money through a subscription agreement for the purchase of common shares in DMH and from unsecured notes from various individuals. DMH is also soliciting money from investors of Del Mar Mortgage," the order says. "These funds have been used to fund loans, purchase investors' positions in existing loans and make interest payments on defaulted loans.

"In one case, Del Mar permitted another developer to assume a defaulted loan without informing investors of problems with the loan or obtaining their approval for the assumption. Although in some cases investors agreed, through loan-servicing agreements, to the automatic granting of loan extensions, they have not been informed of the extension or the reasons for the extension."

* Shustek used Western Funding Investments Plan Inc., a company he owns and controls, to fund loans with money from out-of-state investors, the order says. Peggy May, president of Western Funding, is a Del Mar employee. Funds from Del Mar's trust account were diverted to Western Funding without investors' knowledge. The order says Western Funding engaged in mortgage activities without a license and commingled investor funds with loan collection funds in violation of state law.

* Del Mar Holding, unlicensed as a mortgage lender, made a $3.6 million loan to Palo Verde Square Shopping Center in violation of state law.

* Del Mar Mortgage offered collateralized mortgage obligations in a $20 million private placement. The obligations are claimed to be exempt from securities registration regulations, which require that interests in deeds of trust be purchased as a unit. However, the Del Mar obligation is purchasing fractionalized interests in mortgage loans.

The private-placement memorandum says the real property securing the loans is principally located in Nevada. But as of Oct. 31, 1998, 65 percent of the investments were secured by properties outside Nevada. Del Mar Mortgage is required to act as the servicing agent, but payments on out-of-state loans are made to Del Mar Holdings, which forwards payments to Western Funding.

State agency mum

The state's Securities Division on Friday said it could not comment on investigations in progress and would not say whether Del Mar was under investigation.

Shustek, through prepared responses to specific allegations from the Financial Institutions Division, said Del Mar has not violated any laws.

"Del Mar believes it has substantially complied with the terms of the consent agreement with the division entered into in November," Shustek's statement says.

"Del Mar sends a monthly statement to each investor indicating the status of loans.

"Del Mar Holdings Inc., which is not a mortgage company, completed a private placement of its securities, in compliance with state and federal securities law," the statement says.

"Del Mar did not divert money from other loans to hide defaults. Instead, Del Mar properly arranged the injection of additional capital from the private placement by Del Mar Holdings, into weaker loans to protect the interests of investors."

Shustek had no further comment beyond the prepared statements.

Prior controversy

Friday's takeover was the second run-in Shustek has had with the state in 18 months.

An anonymous letter to Walshaw prompted state officials to look at Del Mar in July 1997. At the time, Shustek said he suspected the letter was written by a disgruntled employee who went to work for a competitor.

Although Walshaw said he found no evidence to substantiate claims made in the letter, it did lead to Shustek resigning as chairman of the board of directors of Nevada First Bank, which was becoming chartered at the time.

Thomas Jurbala, co-owner and president of Del Mar, and John Blackmon, president and chief executive officer of the bank, also resigned from the bank board in September 1997. The three officers said they wanted the bank to be formed without controversy.

Nevada First Bank went on to be successfully chartered and operates a block away from Del Mar's office.

Shustek, meanwhile, has kept a high public profile since the 1997 investigation. He and Del Mar have donated thousands of dollars to charities such as the Nevada Senior Games, and Shustek has taught a course at UNLV on mortgage law and ethics.

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