What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing in this video we're going to talk about a massive fraud that has been going on in the public real estate industry. Specifically, it involves the manager of several publicly traded reits in the fraud, the perpetrator, funneled, tens of millions of dollars of investor money into his own personal accounts and into the accounts of one of his other companies. It took place over the course of 10 years and was only recently uncovered by the sec. The perpetrator used a combination of self-dealing tricking, his board members and flat out transferring money out of his reits into his own bank, account to defraud investors of more than 30 million dollars.

We're going to go over all the details from what position he was in to enable the fraud to the specifics of what the fraud actually was. Michael shustek is a 62 year old, las vegas resident who ran two publicly traded real estate, investment trusts or reits. You may even have been an investor in one or both of these reits yourself back in 2006. He got in trouble with the sec for violating securities laws through two of his earlier companies.

In that instance, justice raised hundreds of millions of dollars for previous real estate funds in hundreds of seminars and presentations. He misrepresented the payout ratios of the funds. He claimed that the historical payout ratios he advertised were a percentage of net income as opposed to funds from operations with the type of fun that these were 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. It was able to raise hundreds of millions of dollars as a result, after the violation, sustek was fined a hundred thousand dollars and barred from representing any broker, but despite that, he 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 only trade on over-the-counter markets.

Although his two reits had significant assets owned by public shareholders, shustick had near total control over them. He used his power to drain the reits of their assets to his own personal benefit and to the benefit of another company. They ate significant interest in had another company. Besides vrta in vrtb called the parking rate which he has significant personal stake in this street, engages primarily in parking, lots and parking garages.

Shastech made this reit his main business likely because he thought it had more potential than his first two reads in an effort to give the parking rate a boost. He decided to use his near total control over the two other rates to funnel their assets into the parking rate. He was able to blatantly have the other two reits pay the bills of the parking rating. These bills were for things like business asset purchases, taxes, utilities and administrative costs.

Shustick used the two reits to pay the parking rate's bills with surprising blatancy. Whenever money was transferred to the parking rate, shustic never wrote up any written contracts or receipts for their multi-million dollar payments. Instead, the money was just transferred out of the corporate accounts. This was only possible because shustech had complete control over the day-to-day operations of the reads.

In public financial reports, he marked the deficit in cash reserves as loans to be repaid by the parking rating. However, these loans were, of course, never paid back or ever had the intention of being paid back. It was simply a way for shustek to buy some 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 ring.

This contributed to the parking rate, which is not publicly traded. Gaining the interest of institutional investors at high valuations, but shustick's fraud didn't end there. He also operated his two reits in a way that funneled assets to the parking rate and to himself personally, over a period of 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 rate itself or one of shustech'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 multiple times. The result of the fraudulent self dealings resulted in the parking rate gaining millions of dollars, shustick's friend, getting millions of dollars and shustic himself, taking on 1.75 million dollars of illegal profits. At one point, a single transaction cost one of the reits 10 million dollars in the 2000s, one of shustech's friends companies built an office building with a construction loan from the reed.

However, six years later, shastik decides to have the parking rate buy that same property from his friend in order to make the deal look more favorable for the parking rate and to attract more big time investors. He forgave the remaining 10 million dollars owed on the construction loan to the re. The reit got nothing in return for forgiving the loan. Just a year later, the parking rate sold the building back to vrta and vrtv for more than 50 million dollars and another two years after that they were bought back again from the reads.

This churn resulted in a loss of nine million dollars for the reeves. The churn continued for a few more wheelings and dealings in the later 2010s, all the while shasta cracked up one and a half million dollars worth of commissions on the transactions paid to none other than shustek himself. 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 shusteck 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 three percent commissions on the real estate transactions. In reality, under the specifics of the contracts he was not entitled to any commission. The cfo of vrta and vrtb knew that this was the case and protested, but shustek went on paying himself anyway, when shusteck was able to successfully trick the board members into approving the commissions. The cfo resigned over the course of several such commission payments.

Shostek became so confident in his fraud. They started paying himself to commissions before getting the approval from the board members by 2017, shustic's ravaging of vrta and vrtb had slipped the companies almost dry of all their assets, their stock prices collapsed and the total market value of both companies combined shrunk to only seven Million dollars by this point, both companies had been de-listed by the nasdaq and were only traded over the counter, but in shustick size. This just proved a further opportunity to extract the last bit of value from the companies under the reduced financial scrutiny of being otc shostak 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 dollars per year. He also told the same consultant that the company's profits would likely increase five percent per year in the near future. Based on this information, the consultant gave the company a valuation of 32 million dollars. Shostak then took this valuation and approached the board of vrta and vrtv.

He proposed that vrta and vrtb purchased vested 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, but in reality the assumptions that shustek told the expert consultant to make were pure fabrications. Vesting did not make one and a half million 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, rather than grow by five percent per year, as justice said, but neither the boards nor the evaluator knew this information and the boards agreed to pay 8.7 million dollars to acquire vestin. This account for more than the total market cap of both reits combined. In this way, shastic was able to extract the last 8.7 million dollars that he could out of the dying reads. He was the sole owner of vestin before the purchase, so he received the full 8.7 million dollars 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 vrtv. But 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 these gains since he got them. 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 shostek may be brought to justice with jail time or a fine for the remaining money that he hasn't yet spent guys that wraps it up for this video.

If you enjoyed this content, make sure to smash the like button and subscribe, so you don't miss future uploads in the meantime. Thank you. So much for watching and we'll see in the next video wall street millennial signing out.