Federal prosecutors have charged four United Development Funding executives with allegedly engaging in a “scheme to defraud” using three of the company’s investment funds, according to an indictment filed in a Texas federal court.
The funds include 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. The Securities and Exchange Commission revoked the funds’ registrations last August for “failure to comply with periodic filing requirements.”
The executives named in the indictment, Hollis Greenlaw, Benjamin Wissink, Cara Obert, and Brandon Jester, were charged with one count of conspiracy to commit wire fraud affecting a financial institution, one count of conspiracy to commit securities fraud, and seven counts of securities fraud/aiding and abetting.
Federal prosecutors allege that the four defendants conspired to conceal from investors, external auditors, the SEC, and others, the performance of UDF III’s business and financial condition in order to encourage investment in later funds. They are also accused of filing financial documents with the SEC that contained “false and fraudulent representations” concerning the source of funds used to pay distributions and bank loans, and how investors’ money and loans were being used.
Hollis Greenlaw’s attorney, Paul Pelletier, said “While no one wishes to be wrongly indicted, Mr. Greenlaw is grateful that he can now demonstrate the baselessness and vexatiousness of these charges and the egregiousness of the government’s misconduct in a public forum – something we have been trying to do for many years now.”
The UDF 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.
Since inception, UDF III paid monthly distributions to its investors using money purportedly from revenues derived from its loan portfolio. However, according to the indictment, the developers were not repaying the loans made by UDF III, and later UDF IV, quickly enough, causing a shortfall of cash to fund distributions and loan repayments.
To cover the shortfall, the complaint alleges that UDF V began issuing loans to developers who already had loans with the two earlier funds. The money was purportedly used to not only repay the older loans, but to cover the distributions for UDF III and UDF IV, contrary to representations made to UDF V’s investors.
According to prosecutors, 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 allege 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 currently engaged in litigation against Kyle Bass and his hedge fund Hayman Capital. UDF sued Bass after he posted a series of anonymous online reports that accused 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, where the defendants spread damaging information in order to profit from their short positions in UDF IV’s plummeting stock to the tune of $60 million.
“For the past 18 years UDF has financed some of the most successful real estate developments in North Texas,” explained Pelletier, Greenlaw’s lawyer. “For the past 6 1⁄2 years UDF has endured an illegal predatory short-and-distort attack, an unlawful FBI search and a transitory government investigation with ever-changing theories of alleged liability.”
Pelletier claims that during the litigation against Bass and Hayman Capital, they discovered that “the government had collaborated with Bass” in drafting the anonymous posts and “tipped-off” Bass before the search warrant. UDF and its executives filed a Bivens action against the individual agents and prosecutor following what Pelletier calls the “the government’s egregious unconstitutional actions.”
“The government…offered to enter into an agreement not to prosecute UDF or UDF’s executives if UDF and its executives would agree to dismiss the Bivens action. UDF and its executives, as prudent fiduciaries, declined to do so, believing such an arrangement would not be in accordance with the law and relevant ethical considerations,” said Pelletier.
“The government now, after more than six years, has filed this criminal action intentionally mischaracterizing the economic reality for the repayment of [UDF] IV loans and erroneously concluding that these transactions, though fully disclosed in UDF’s public filings, constituted criminal disclosure violations,” he added.