Vestin Mortgage faces lawsuit

A state judge in California is holding a trial this week in a class action lawsuit seeking damages for investors who lost money after Vestin Mortgage of Las Vegas converted two mortgage loan funds into publicly traded real estate investment trusts.

The lawsuit, filed by San Diego attorney Erwin Shustak on behalf of Charles Felton and others, claims that investors who voted against the conversion are entitled to cash for their share of the funds.

Investors in Fund I are entitled to $7.72 a unit and investors in Fund II are entitled to $7.93 a unit, according to a witness for the plaintiffs.

In addition, investors who were 60 years of age or older at the time of the conversion are entitled to double the amount of actual damages, according to the lawsuit.

The lawsuit said investors who opposed the conversion were given stock certificates for two realty trusts.

Shares in real estate investment trusts trade like stock in a public company, and the trusts started trading at a discount to the appraised value of the funds.

The companies, Vestin Realty Mortgage II and Vestin Realty Mortgage I, and the two predecessor funds made short-term loans to developers and others who pledged real estate as collateral.

If the plaintiffs prevail in the lawsuit, the judgment could be costly to Michael Shustek, owner of Vestin Mortgage, and shareholders in two trusts.

"We don't comment on litigation that's in process," said Vestin spokesman Steve Stern of Stern and Co. public relations.

He declined to comment on whether Vestin Realty Mortgage I and II might be required to use investor funds to pay any of the potential judgment.

The lawsuit revolves around a legal question involved in the 2006 conversion of Vestin Funds I and II.

The lawsuit argues that an agreement provided that investors who voted against the conversions were entitled to their share of the appraised value of the fund, but it says Vestin Mortgage refused to make the cash payments.

The legal question is whether the transaction was a "roll-up" of the fund, which would entitle the investors who voted "no" to get cash buyouts. Vestin argued that it wasn't a roll-up and persuaded the Securities and Exchange Commission that its interpretation was correct. The lawsuit accuses Vestin of misleading the SEC.

Vestin said that converting the funds into publicy traded trusts would give investors a way to cash out. A provision in federal law prevented Vestin from paying more than 10 percent of the funds yearly because they were partnerships and paying out more than 10 percent would force the partnerships to change into corporations and pay corporate taxes.

In an affidavit, Shustek claimed that Shustak started pursuing the lawsuit after the plaintiffs' attorney reached a confidential settlement with Vestin over arbitration involving investors identified only as Mr. and Mrs. Allen, trustees for the Allen Family Trust. The Vestin CEO said the company denied all liability and settled the arbitration to avoid a lawsuit.

Shustek said that the San Diego attorney broke an agreement to keep the settlement confidential by sending a letter about the "successful resolution" to other Vestin investors.

Shustek said neither the Allens nor Shustak returned any of the undisclosed settlement payment.

In heavier-than-average trading, shares in Vestin Realty Investors II, the larger of the two REITs, rose 8 cents, or 3.3 percent, Thursday to closed at $2.49 on the Nasdaq. Vestin Realty Investors I gained 3.3 cents, or 2.7 percent, to close at $1.25.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or 702-383-0420.