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The trials and tribulations of Neil Shekhter
From the April issue: Neil Shekhter was once known first and foremost as the kingpin of the largest apartment developer in Santa Monica, NMS Properties. But in the past three years, Shekhter has gained a different kind of notoriety, as he and the firm have been ensnared in courtroom warfare with NMS’ former financial partner, AEW Capital Management.
At its base level, the dispute centers on several clauses in a joint-venture agreement — hardly the type of news most would classify as “juicy.” But one look at the allegations from both sides tells a different story — one that involves claims of doctored agreements, straw-man transactions, accusations of assault and the testimony of a former Secret Service agent.
Those salacious details, along with the $400 million-plus value of the nine-building portfolio at the center of the case, have made the NMS-AEW dispute one of the most-discussed legal cases in California’s real estate community.
What are they fighting over, anyway?
Amid the legal turmoil, which now includes a RICO complaint filed by AEW, the sides agree on at least one thing: The two parties entered into a joint venture on nine high-value properties.
Shekhter, an immigrant from the former Soviet Union who began his real estate career in the mid-1990s, said he started purchasing some of the properties that would come to make up the disputed portfolio in 2005. With four properties already entitled, his real estate company began seeking a financial partner for construction capital around the time of the Great Recession, Shekhter said in an interview conducted with The Real Deal in February, during which he looked to prove his innocence.
Hard hits to the financial and real estate industries had made traditional capital hard to come by, Shekhter said. He was introduced to the large, Boston-based hedge fund AEW through a friend. After several rounds of negotiations, AEW and NMS entered into a joint-venture agreement in June 2010.
According to Shekhter, NMS entered the agreement as its operating member, contributing money and properties that, when combined, totaled $100 million. Shekhter said that AEW, the investor member, contributed just $60 million. Both figures were disputed by AEW’s attorney, Gibson, Dunn & Crutcher’s James Fogelman, in a mid-March interview. He said Shekhter’s assertion that NMS’ contribution dwarfed the investor member’s was “false.”
The portfolio would grow to include nine apartment buildings, seven of which are located in Santa Monica. The other two — the largest assets in the venture — are Harlow in Culver City and Luxe in West Hollywood. In total, the properties span nearly four acres and comprise 415 units. Under the agreement, NMS managed eight of the properties.
For nearly three years, the two sides operated with little turmoil. But that changed in June 2013, when Shekhter sought to buy AEW out of the joint venture by exercising what his side argues is a repayment clause in the agreement.
Section 6.1 of the joint-venture agreement lays out the terms for distributing the assets if NMS monetized AEW’s investment within five years. Under that provision, AEW would get back its initial investment plus a 24 percent per annum return. Shekhter and his team interpreted that provision as a repayment clause that would end AEW’s stake in the venture once triggered. In June 2013, he emailed an offer to AEW for $106 million.
When the hedge fund’s West Coast director, Eric Samek, replied in November 2013, he rejected Shekhter’s right to make the offer and said that several key portions of the agreement Shekhter had cited were falsified, which was “alone sufficient to trigger” a provision of the agreement removing NMS as the operating member of the joint venture.
Shekhter denied the doctoring allegations. He has described Samek’s email as the first step in a “scheme” to remove NMS from the agreement and sell off a portfolio that’s now worth upwards of $430 million.
“AEW realized they had created a portfolio worth half a billion dollars, and they decided to take it all,” Shekhter told TRD. That accusation was vehemently denied by the hedge fund through its attorney, Fogelman.
Don Henley, forgery allegations and the judge’s orders
In 2014, Shekhter turned to the legal system to exercise what he viewed as his right to force AEW into accepting NMS’ repayment offer. The lawsuits garnered press coverage for their dramatic flair: One NMS complaint led with the phrase “Pigs get fat, hogs get slaughtered” and quoted lyrics from the Eagles’ Don Henley.
Despite the attention-grabbing language, Shekhter was unable to prove his case. Judge Suzanne Bruguera issued two separate orders that crippled Shekhter’s claim that NMS had the right to force AEW to exit the venture.
The first order, issued by Bruguera in June 2016, called the NMS claim a “sham pleading” and ruled that Section 6.1 contained no buyout or monetization rights. The second order, issued on Nov. 22, 2016, ruled in favor of a cross-complaint filed by AEW, which alleged that Shekhter and his team doctored a copy of the 2010 joint-venture agreement, amending a buy/sell clause that, when triggered, allowed either JV member to buy out the other. AEW said Shekhter’s side had forged that section by lowering its enactable time frame from five years to three years. The ruling awarded AEW sole discretion to sell the portfolio as per the terms of the original agreement.
The hedge fund’s attorneys called several witnesses — including Gerry LaPorte, a former Secret Service agent and current acting director of the National Institute of Justice’s Office of Investigative and Forensic Sciences — who testified that NMS’ representatives engaged in an orchestrated attempt to falsify documents by altering language, reappropriating signatures and backdating files.
More outrageous than the forgeries were the steps that Shekhter and associates took to conceal them, the judge’s orders said. The court documents said Shekhter engaged in an action his own expert witness, Scott Cooper, called “dumb” and a “horrendous idea”: replacing the hard drive on his personal home computer — on which he reportedly conducted company business — the day before he was supposed to turn it over for forensic examination in October 2015.
The new computer was “flooded” with 75,000 artificially backdated files but was missing key documents AEW’s experts sought, Bruguera wrote. The order also said that either Shekhter or his son, Alan, conducted internet searches like “secure wipe hard drive” and “how to avoid computer forensics” the day before the forensic examination was scheduled to take place.
A text-message exchange included in a 2017 suit (see graphic, right) brought by AEW details what it says were Shekhter and his son’s attempts to cover up evidence.
Neil Shekhter
Bruguera’s order also found that other NMS employees, including IT administrator Enrique Sanchez, worked to destroy company hard drives and erase relevant files in December 2015, conducting internet searches for phrases including “free SSD secure erase” and downloading an application called “Eraser Portable.”
All told, at least three desktop computers, three external hard drives, and 20-plus USB drives were either destroyed, manipulated or hidden from forensic investigators, according to AEW’s 2017 suit.
In his sworn declaration, Shekhter had said he switched the hard drives to prevent private pictures of his wife from getting into “the wrong hands.”
“The hard drive on my personal computer has absolutely nothing to do with our dispute. All the JV business records are all intact in all the computers at the company, and all the JV records were 100 percent turned over to AEW,” said Shekhter.
Shekhter’s side is appealing both rulings, which dismissed the case in its entirety and levied $5 million in legal fees against NMS.
“I strongly believe that everything that happened in that courtroom is going to be overturned,” Shekhter said.
New owners and assault allegations
While the legal proceedings were playing out, AEW was marketing the properties involved through Eastdil Secured — a right attorney Fogelman said was afforded to AEW under Section 8.1 of the agreement, which gives the investor member sole authority to sell the properties.
In October 2016, roughly a month before Bruguera’s second order, a contract for the properties was executed, with buyer Verbena Road Holdings — a subsidiary of San Francisco-based SPI Holdings — agreeing to pay $430.5 million, or about $568 per square foot, for the portfolio. The sale went through in November.
Shekhter’s team filed a suit disputing the legality of the Verbena deal, stating that AEW’s sale constituted a breach of contract and interfered with the ongoing litigation surrounding the properties.
“Rather than await resolution of the litigation, defendants sought to forcibly take over the properties,” reads that lawsuit, which is currently before Santa Monica Superior Court Judge Gerald Rosenberg.
Shekhter’s complaint disputing the sale names members of the buying group, Golden State Warriors minority owner Dennis Wong and Mark Friedman, founder and president of Sacramento-based Fulcrum Property, a company that has a financing relationship with AEW dating back to at least 1991, according to Fulcrum’s website. Shekhter has attempted to cast the sale as a “straw man” transaction designed to benefit AEW that could only be conducted after NMS was removed as the joint venture’s operating member.
“Our position is that the sale is bogus and was simply designed to take away profit from NMS and to throw NMS out as property manager,” Shekhter said in the February interview.
That assertion is contradicted by Eastdil Secured President D. Michael Van Konynenburg, who in a February 2017 court declaration said that a thorough analysis of all potential buyers was conducted and that the portfolio was sold to the “most qualified bidder” after an “arms-length” negotiation.
Then came one of the more eye-popping moments of the saga: an NMS claim that the properties’ new owners staged a hostile takeover of the buildings, and a counterclaim that Shekhter had assaulted one of the new owner’s representatives.
On Nov. 21, representatives from SPI Holdings and a new property-management team arrived at the eight buildings in the portfolio that NMS managed and declared themselves in charge, Shekhter said.
Shekhter recounted that he drove to the property at 1410 Fifth Street in Santa Monica, where he found a team of executives, management, security, maintenance and IT workers had taken over, attempting to force out his employees, change the building’s locks and remove sensitive documents and data.
Shortly after the incident, SPI filed a complaint in Superior Court alleging that Shekhter “physically assaulted one of … the representatives by grabbing him by the neck and shoving him out the door of the managerial spaces at one of the properties.”
Shekhter denied that claim.
“They tried to take a box that belonged to us,” he said. “I simply did not allow them to take the box.”
Eventually police were called, and after a lengthy discussion, the new company’s representatives left, according to both sides. No charges were filed.
‘They’re simply trying to destroy my reputation’
Already facing an uphill battle to prove his case, Shekhter was hit with a 102-page racketeering complaint by AEW’s representatives in January. The plaintiffs allege that Shekhter and his representatives had not only attempted to mislead AEW and the courts but also lied to banks, third-party vendors, insurance companies and “countless others,” acting as a “criminal enterprise.”
Shekhter dismissed the RICO complaint as the latest step in a plan to deny NMS what it is owed through the joint venture, despite what the court orders show.
“We believe it was [designed] to put pressure on us and intimidate us — the case has absolutely no merits,” he said.
But the ongoing litigation and new allegations have placed Shekhter and NMS under a greater level of scrutiny. For example, the city of Santa Monica in February drafted a plan to review its contracts with NMS Properties, focusing on development agreements concerning issues such as setbacks, public spaces and affordable-housing requirements. Ultimately, a six-page report issued by the city in late March found the company and its affiliates to be in compliance for the 23 buildings they own and manage in Santa Monica.
“We believe this demonstrates that NMS has always, and will continue to, comply with all requirements, including affordable housing, for buildings it constructs, owns and manages,” Shekhter said through a representative on March 29.
With multiple court rulings against him and a looming RICO suit, Shekhter denies any wrongdoing while maintaining his rights to the properties. In the near term, Judge Rosenberg ordered a third-party property manager, Lincoln Property Co., to assume day-to-day operations at the buildings until the case is resolved.
For Shekhter, an immigrant who went from cab driver to one the largest developers in Santa Monica, the litigation amounts to theft — not only of the properties, but also of his and his family’s reputation.
“I’ve been in the country for 37 years, and I take pride in what I do,” Shekhter said. “By filing this lawsuit, they’re simply trying to destroy my reputation, which at the end of the day is all people have.”