Henderson firm fighting ‘smear attempt’ by shareholders

By Steve Green

Thursday, Dec. 2, 2010 | 11:52 a.m.

Desert Capital REIT Inc., a Southern Nevada real estate fund, says some of its stockholders have been violating federal law by improperly advocating for replacement directors to be elected at the company's annual meeting Dec. 7.

CEO and Chairman of the Board Todd Parriott wrote in a letter to stockholders Wednesday:

"You may recently have been contacted by one or more of our stockholders and furnished with information urging you to vote in favor of various proposals being made by these stockholders at Desert Capital’s annual meeting of stockholders.

"These stockholders have failed to file proxy materials with the Securities and Exchange Commission, which means they have broken federal securities laws that were enacted to protect you and all other investors in public companies.

"Also, the information you received contained misstatements and unfounded allegations, including the following: 'You may be aware that the current Board of Directors gave themselves a raise for the year beginning Jan. 1, 2011. They doubled their 2010 salaries.' The Desert Capital Board of Directors has not raised the amounts that they will be paid in 2011. On the contrary, the amount of the annual retainer and per meeting fees to be paid to our Board of Directors will be the same for 2011 as they have been for each year since the company’s initial public offering in 2004.

"On Nov. 24, Desert Capital received several proxy cards solicited by the aforementioned stockholders that, among other things, attempted to vote for an alternative slate of directors. These proxy cards, and any other proxy card sent to you by these stockholders, are not valid and will not be effective at the stockholders’ meeting.

"The Board of Directors and management of Desert Capital REIT do not support these efforts and we are writing to you because we do not want our stockholders to be misled or confused by an attempt to smear our reputation by illegal and improper actions," the letter said.

Stockholders of Henderson-based Desert Capital may be concerned because the fund's assets declined from $83 million at the end of 2009 to $42.5 million as of Sept. 30.

The company lost $23.8 million in the quarter ended Sept. 30 vs. a loss of $10.9 million in the year-ago quarter.

Desert Capital also said in its quarterly earnings report that in October it received a subpoena from the SEC "requesting certain information pertaining to payments and transactions with our related party," CM Capital Services LLC (formerly known as Consolidated Mortgage and previously owned by Desert Capital).

All of Desert Capital's loan servicing activities are provided by CM Capital.

Desert Capital didn't disclose what exactly the SEC is looking into.

In July, CM Capital, which is controlled by Parriott, agreed to pay the state a fine of $200,000 and investigative and legal costs of $15,000 to settle a complaint that it violated regulations of the Department of Business and Industry's Division of Mortgage Lending.

During an August hearing on that settlement, Dean Altschuler, a longtime certified public accountant and investor with CM Capital, charged CM Capital had been diverting funds from investors to pay inflated costs for managing foreclosed properties and said: "I feel there are multiple ongoing violations occurring today by CM Capital."

Desert Capital, which launched during the Southern Nevada real estate boom in 2003, is a hard money lender that initially provided short-term mortgage loans to homebuilders and commercial developers. Hard money lenders pool investors' funds and loan them to developers.

Unlike insured bank deposits, these investments at high interest rates yielded profits for investors during the boom years. But with the recession, many Nevada hard money lenders are now either closed or mired in litigation with disgruntled investors who have seen the value of their investments tumble because of foreclosures and other problems.

With the real estate market decline since 2008, Desert Capital said it started foreclosing on its loans and has foreclosed on substantially all of the outstanding loans.

Desert Capital initially planned to hold on to the real estate until the market improves, but lately has been selling assets at distressed prices in order to raise cash for operating expenses.

In his letter Wednesday, Parriott said: "Desert Capital’s portfolio was dramatically impacted by the crash of the real estate and credit markets that occurred in 2008. Unfortunately, the real estate market in the Las Vegas area continues to be very challenging as property values in some sectors have not yet stabilized. Despite these challenges, your Board of Directors and management team continue to seek opportunities to maximize value for all of our stockholders."