Four UDF Executives Convicted of Fraud
Four United Development Funding executives have been found guilty of fraud following a five-day trial and almost 12 hours of deliberation.
Four United Development Funding executives were found guilty of fraud on Friday following a five-day trial and nearly 12 hours of jury deliberation.
Chief executive officer Hollis Greenlaw, president Benjamin Wissink, chief financial officer Cara Delin Obert, and asset management director Jeffrey Brandon Jester were convicted on all 10 counts, including conspiracy to commit wire fraud affecting a financial institution, conspiracy to commit securities fraud, and securities fraud. Paul Pelletier, Greenlaw’s attorney, confirmed that the defendants plan to appeal the verdict.
The executives, who each face up to 25 years in federal prison, were accused of orchestrating a scheme to mislead investors and the Securities and Exchange Commission on the performance of UDF’s investment funds.
The Dallas Business Journal reported that they were taken into custody immediately after the trial and were held until a detention hearing on Monday.
“UDF executives shuffled money from one fund to another without disclosing the co-mingling to investors or regulators,” said Chad Meacham, U.S. Attorney for the Northern District of Texas. “The Justice Department takes financial improprieties seriously, and we are proud to hold these defendants accountable for their crimes. After a long battle, justice has been done.”
Founded in 2003 and headquartered in Grapevine, Texas, UDF utilized a family of five private and public investment funds – UDF I, II, III, IV, and V – to invest in various residential real estate developers and private homebuilders.
Specifically, the funds were created to provide loans to residential housing developers by using money obtained from investors and financial institutions. The developers were required to pay back the loans with interest, which would serve as the source of distributions paid to investors.
When developers failed to repay the money they borrowed from one fund, triggering multi-million dollar shortfalls, the defendants reportedly transferred money out of another fund in order to pay distributions to the original fund’s investors, all without disclosing the transfers to the SEC and the investing public, prosecutors said.
The registration statements of UDF III, a limited partnership, UDF IV, a real estate investment trust that previously traded on the Nasdaq and later the over-the-counter market, and UDF V, a non-traded REIT, were revoked by the SEC in August 2020 for “failure to comply with periodic filing requirements.”
According to the prosecution, from January 2011 until November 2015, approximately $65 million in UDF IV investors’ money was used to pay UDF III investors a return on their investment and fulfill other financial obligations. Similarly, they alleged that approximately $7.4 million in UDF V investors’ money, along with money obtained from a financial institution, was purportedly used to pay returns to UDF III and UDF IV investors.
In July 2018, UDF agreed to pay roughly $8.3 million to settle similar charges brought by the SEC, without admitting or denying the allegations.
UDF is also engaged in ongoing litigation against Kyle Bass and his hedge fund Hayman Capital, although the district court twice denied allowing any evidence relating to Bass from being included in the federal trial.
UDF sued Bass after he posted a series of anonymous online reports in late 2015 accusing UDF IV of operating as a Ponzi scheme – an accusation the company has vigorously denied. UDF contends that Bass and Hayman Capital instigated a “short-and-distort” campaign and spread damaging information in order to profit from their short positions in UDF IV’s plummeting stock – to the tune of $60 million.
In February 2016, shortly after Bass/Hayman revealed their short positions, the FBI raided UDF’s Grapevine office and seized multiple boxes. This followed the December 2015 revelation that UDF was the subject of a nonpublic fact-finding investigation conducted by the SEC that began in April 2014.
Pelletier previously told The DI Wire that during the litigation against Bass and Hayman, they discovered that “the government had collaborated with Bass” in drafting the anonymous posts and “tipped-off” Bass before the search warrant.
The Dallas Business Journal reported that Greenlaw testified that the FBI raid sent his company into a tailspin.
“After the execution of the FBI search warrant, we basically lost access to the capital markets…,” Greenlaw stated. “[The FBI agents] took every piece of paper out of our business. They took three-and-a-half U-Hauls full.”
A pre-sentence investigation is scheduled to take place by March 14th, followed by a sentencing hearing on May 20th.
