Violations found in probe of LV lender

Kevin Rademacher

Wednesday, April 16, 2003 | 11:41 a.m.

Vestin Mortgage Co. and Del Mar Mortgage Co., both controlled by real estate financier Michael Shustek, have been accused by the state Financial Institutions Division of misconduct in dealings with developer Howard Bulloch.

The investigation, conducted by division Commissioner Scott Walshaw, was ordered by District Court Judge Sally Loehrer in December after Bulloch claimed the Shustek companies' actions cost him millions of dollars and that the Financial Institutions Division had failed to thoroughly investigate his case.

Thirteen allegations were investigated by Walshaw. He concluded that four violations appear to have been committed.

The alleged violations include the disproportionate distribution of a $500,000 loan payment. The investigation claims the money was paid to a single investor and not distributed to all investors involved in the loan.

An allegation also was made regarding the disbursement of about $147,000 an investor overfunded on a loan. The investigation said the money was repaid to that investor by Vestin Mortgage via Shustek Investments, rather than through appropriate escrow procedures.

The investigation also alleges that the company maintained inadequate documentation to refute a claim that a $3.8 million penalty fee was not deposited in an investor trust.

The fourth alleged violation is that "reasonable cause exists" that the current findings violate a 1999 settlement with the state agreed to by Del Mar in order to clear up an unrelated investigation, Walshaw reported.

Del Mar was seized by state regulators in 1999 over allegations that included concealing information from investors. In the settlement, the company agreed to implement operating procedures intended to keep investors better informed regarding their investments and to resolve other operating concerns.

The current matter is scheduled to go back before Loehrer on April 24, said Richard Linstrom, assistant solicitor general at the Nevada Attorney General's office. If the judge is satisfied with the findings presented in the investigation, the Financial Institutions Division could issue a "show cause" order to Vestin and Del Mar that could lead to formal hearings into the possible violations, Linstrom said.

He declined to characterize the seriousness of the allegations.

Paul Connaghan, in-house counsel for Vestin, said the company has not been served with a copy of the investigation report and was not allowed to participate in the District Court proceedings.

"We really have due process concerns here," he said.

The investigation stems from a dispute that began in 2000 over two loans Bulloch received from Del Mar Mortgage. Bulloch claimed he was forced to make unscheduled payments on a $13 million loan for property at Las Vegas Boulevard and Blue Diamond Road and a $34.5 million loan for land near McCarran International Airport before the larger loan would be funded.

Bulloch claimed he made a payment of $4.5 million on the Blue Diamond loan, but when a $3.5 million payment on the McCarran loan was not made, a $4.13 million penalty was imposed.

Walshaw's investigation found that "reasonable cause does not exist that this penalty is a violation." That decision contradicts last month's $4.13 million federal court judgment against Del Mar, finding that the penalty imposed on Bulloch's company, Desert Land LLC, was "unlawful."

Connaghan said Vestin has asked for a reconsideration of the federal court ruling and will appeal if denied.

Connaghan and Linstrom said no investors have raised concerns over the loans.

"Approximately 1,000 investors were involved. None complained," Connaghan said. "All have received the return of all the principle with interest."

He said the company is "standing by and weighing legal remedies."

In recent filings with the U.S. Securities and Exchange Commission, Vestin said it has raised more than $441 million for three real estate investment funds. The company said it placed 79 loans totaling more than $478 million in 2002, up from 54 loans for $244 million in 2001.

Vestin also said it earned $3.8 million or 34 cents per share on revenue of $31.9 million in 2002, up from $1.8 million or 26 cents per share on revenue of $21.4 million in 2001.

The company also disclosed plans to raise $500 million by selling subordinated notes and said it would use the funds to establish additional mortgage operations around the country.