Michael Shustek is a 62 year old Las Vegas resident who ran two publicly traded real estate investment trusts (REITS). Back in 2006, he got in trouble with the SEC for violating securities laws through two of his earlier companies. In that instance Shustek raised hundreds of millions of dollars for previous real estate funds.
In hundreds of presentations he misrepresented the payout ratios of the funds. He claimed the historical payout ratios he advertised were a percentage of net income as opposed to funds from
operations. With these types of funds it is generally understood that net incomes are significantly lower than funds from operations. Because of this payout ratios based on funds from operations are generally much higher than those based on net income. By making these claims he deceived investors into thinking the funds performed much better than they actually did.
He was able to raise hundreds of millions as a result. After the violation Shustek was fined a $100,000 and barred from representing any broker but continued running his own publicly traded companies – including two REITS with ticker symbols VRTA and VRTB.
In the mid-2010s both of the REITS fell into penny stock status and were delisted from the Nasdaq.
Currently they trade on over-the-counter markets, although his two REITS had significant assets owned by public shareholders, Shustek had near total control over them. He used his power to drain the REITS of their assets for his own personal benefit.
Shustek had another company called the Parking REIT, which he has a significant personal stake
in. This REIT engages primarily in parking lots and parking garages. Shustek made this REIT his main business because he thought it had more potential than his first two REITS. In an effort to give the Parking REIT a boost, he decided to use his control over the two other REITS to funnel their assets into the parking REIT.
He was able to blatantly have the other two REITS pay the bills of the Parking REIT. These bills were for things like business asset purchases, taxes, utilities and administrative costs. Whenever money was transferred to the Parking REIT, Shustek never wrote up any written contracts or receipts for their payments. Instead the money was just transferred out of the corporate accounts. This was only possible because Shustek had complete control over the day-to-day operations of the REITS.
In public financial reports, he marked the deficit in cash reserves as loans to be repaid by the Parking REIT. However these loans were of course never paid back. It was simply a way for Shustek to buy more time before people figured out what was going on. In the end a staggering $29 million dollars was siphoned off from their REITS into Shustek’s Parking REIT.
This contributed to the Parking REIT which is not publicly traded, attracting the interest of institutional investors at high valuations but Shustek’s fraud didn’t end there. He also operated his two REITS in a way that funneled assets to the Parking REIT and to himself personally. Over four years, he had the REITS buy and sell several Las Vegas office buildings multiple times.
Each time the counterparty to the transactions were either the Parking REIT itself or one of Shustek’s friends’ companies. These transactions were consistently unfavorable to the REITS. They would sell the buildings at a low price and buy them back at much higher prices. The result of the fraudulent self-dealings resulted in the Parking REIT gaining millions of dollars.
At one point a single transaction cost one of the REITS $10 million. In the 2000s one of Shustek’s friends’ companies built an office building with a construction loan from the REIT. However six years later Shustek decides to have the Parking REIT buy that same property from his friend. In order to make the deal look more favorable for the Parking REIT and to attract more big time investors, he forgave the remaining $10 million owed on the construction loan to the REIT.
The REIT got nothing in return for forgiving the loan, just a year later the Parking REIT sold the building back to VRTA and VRTB for more than $50 million and another two years after that they were bought back again from the REITS. This churn resulted in a loss of $9 million for the REITS.
It may seem strange that the CEO of a public company can pay himself for real estate transactions. In reality it was likely illegal but Shustek was able to trick his board members into approving the transaction commissions. He lied to the board members by telling them that he was technically entitled to the standard 3% commissions on the real estate transactions. In reality, he was not entitled to any commission.
The CFO of VRTA and VRTB knew this was the case and protested but Shustek went on paying himself anyway. When Shustek was able to successfully trick the board members into approving the commissions, the CFO resigned. Shustek became so confident in his fraud that he started paying himself to commissions before getting the approval from the board members.
By 2017 Shustek’s ravaging of VRTA and VRTB had sucked the companies almost dry of all their assets. Their stock prices collapsed and the market value of both companies combined shrunk to $7 million. Both companies were de-listed by the Nasdaq and only traded over the counter but in Shustek’s eyes this just proved a further opportunity to extract the last bit of value from the companies under the reduced financial scrutiny of being OTC.
Shustek owned yet another company called Vestin Advisor that provided investment advising services. He hired an expert consultant to calculate a fair value for this company, telling the consultant that the company was making $1.5 million per year. He also told the same consultant that the company’s profits would likely increase 5% per year in the near future. Based on this information, the consultant gave the company a valuation of $32 million. Shustek then took this valuation and approached the board of VRTA and VRTB. He proposed that VRTA and VRTB purchase Vestin for $8.7 million. Based on the $32 million valuation from the expert consultant, this appeared like an extremely accretive deal, valuing the company at nearly four times what they were paying for it.
Vestin did not make one and a half dollars a year in fact it only made about one tenth of that amount. Furthermore, it was losing clients and likely to see profits reduced in future years.
The boards agreed to pay $8.7 million to acquire Vestin. This accounts for more than the total market cap of both REITS combined, in this way Shustek was able to extract the last $8.7 million dollars that he could out of the dying REITS. He was the sole owner of Vestin before the purchase so he received the full $8.7 million personally from the transaction.
Shustek apparently thought that no one would expose him and readily lied to investors on the annual and quarterly reports for VRTA and VRTB. Somehow the SEC was able to uncover his fraud once again and is asking a judge to force him to discourage all of his ill-gotten gains. Even if he does, he probably has spent the majority of the money. It’s unlikely that any of the early investors in VRTA and VRTB will ever get any of their money back. The best they can hope for is that Shustek may be brought to justice with jail time or a huge fine.
James Kelly is my name and penny stocks are my game! Former day trader turned long-term investor with a decade of experience in the market. Over the years, I’ve joined dozens of trading services and I aim to provide honest reviews to help traders make better decisions!