Developer Michael Mastro misled investors, state says

Bankrupt Seattle real-estate magnate Michael R. Mastro broke the law by misleading so-called "Friends & Family" investors from whom he raised $100 million, state regulators charged Friday.

Mastro made false statements to investors and omitted important information, the state Department of Financial Institutions' securities division said.

He also broke a state law barring the sale of unregistered securities, the 15-page document contends.

The division began investigating Mastro in February. In the charging papers, it said it intends to fine the developer $100,000 and order him to stop accepting any more money from individual investors.

Mastro can contest the charges and proposed penalties by requesting within 20 days a hearing before a state administrative law judge, said Michael Stevenson, the state's securities administrator. Stevenson said he expects Mastro will ask for a hearing.

Mastro could not be reached for comment; he mentioned the pending investigation in a July 31 letter to his investors, saying he'd done nothing wrong. Jerry Stehlik, one of his bankruptcy lawyers, said his firm is not representing Mastro in this matter.

Over the years, Mastro raised more than $100 million from more than 175 investors he referred to as Friends & Family, using the money to buy and develop property and make loans to other developers.

The charging papers say he provided the investors with little information when they loaned him money, failed to adequately disclose risk, and kept them in the dark when his empire began to crumble last year.

Mastro's 40-year real-estate career came to a halt this summer when three banks forced him into bankruptcy involuntarily, charging he was not paying his debts. After initially resisting, Mastro, 84, agreed to enter bankruptcy.

In documents filed with U.S. Bankruptcy Court last month, he reported $249 million in assets against nearly $587 million in liabilities, most of that owed to banks whose debt is secured by the properties that Mastro bought or developed with their money.

The Friends & Family investors are listed mostly as "unsecured" creditors, the last group to be paid when Mastro's assets are liquidated. It's highly possible they will get nothing.

While Mastro referred to them as Friends & Family, the charging papers say, some were neither.

Most learned of Mastro by word-of-mouth. Some first loaned him money decades ago. Some are in their 70s and 80s. Many, like Mastro, are Seattle natives and Italian Americans.

More than a dozen Friends & Family investors who spoke with The Seattle Times last month said their investments performed well until the real-estate and credit markets collapsed last year. Some continued to defend Mastro, calling him a victim of unprecedented economic circumstances.

Mastro issued the investors promissory notes that, in recent years, pledged 9 percent annual interest, compounded monthly, on accounts of $100,000 or more. The notes also said investors could withdraw their principal at any time.

"Most of the investors were not in the business of making loans, and they did not have any significant real-estate experience," the division's charging papers say.

"Mastro generally did not give the investors any written offering materials" or tell them specifically how their money would be used, the document says.

When one investor asked Mastro for a prospectus, according to the document, Mastro told him "we don't do that here."

Some retired investors with net worths of less than $1 million loaned more than 75 percent of their savings to Mastro, the charging papers say, and some were led to believe their investments entailed no risk.

The developer also misrepresented to some Friends & Family that their investments were secured by insurance policies on his life, or by interests in real estate, the document adds.

Mastro continued to accept Friends & Family investments in 2008 and early 2009 without disclosing to investors that his business was in financial trouble or that the market value of his real-estate holdings was dropping, the charging papers say.

Mastro apparently sold notes worth more than $1 million to three investors in January and February of this year, and notes totaling nearly $15 million to more than 20 investors in 2008, according to the securities division.

Rick Leavitt, of Bellevue, said he was one of those investors. He said he loaned Mastro money in August 2008 and asked if it was safe. "He said, 'No problem,' " Leavitt said Friday.

"I'm upset. I believed him, that he was always a man of his word ... He was taking money right up to the end, knowing he was in trouble."

Retired restaurateur Barry Bloch, another Friends & Family investor, applauded the state's move against Mastro. "I think there's both fairness and justice in the government going after him," he said.

The securities division's charges could help Friends & Family in efforts to obtain some of Mastro's assets that may be shielded from liquidation now, Bloch said.

The division's Stevenson said the investigation is continuing. He said investigators want to interview Thomas Kenyon, Mastro's chief financial officer, and Mastro's son, Michael K. Mastro, whom the senior Mastro has testified headed the business' construction arm. Both also are Friends & Family investors, according to court papers.

The charging papers against Mastro were filed Oct. 1 but were not made public until Friday afternoon. Stevenson said the delay was because officials couldn't find Mastro to serve him until Friday.

The proposed $100,000 fine would not be collected until Friends & Family investors are repaid in full, the charging papers say.

Eric Pryne: 206-464-2231 or epryne@seattletimes.com