NexPoint Offers Statement on UDF IV Bylaw Change and Litigation

NexPoint Advisors L.P., a Dallas-based alternative investments firm, commented on both recent corporate bylaw amendments enacted by United Development Funding IV company – a real estate investment trust in which NexPoint is a significant shareholder – and on ongoing litigation between the parties. The changes to UDF IV bylaws include the removal of restrictions that the Board of Trustees previously enacted, which limited the ability of shareholders to propose nominees to the board.

NexPoint serves as the adviser to a suite of funds and investment vehicles, including a closed-end fund, interval fund, business development company, and various real estate vehicles. In a Feb. 8 news release, NexPoint issued the following statement:

“NexPoint continues to pursue remedies on behalf of UDF IV shareholders for the company’s ill-conceived entrenchment tactics, lack of liquidity and extreme deficiencies in transparency, which have been perpetuated by the Board of Trustees and continued even after the company’s executives were convicted and incarcerated for fraud.”

 “NexPoint seeks to rectify the harm that shareholders have endured for years, and our legal actions are already making an impact; in December, UDF IV finally held its first annual meeting in eight years and since amended its bylaws to remove some of the onerous restrictions that disenfranchised its shareholders. NexPoint intends to continue to push for a full election of all independent trustees and to hold the investment manager and other parties accountable for their roles in harming shareholders.”

The latest example of alleged shareholder mistreatment arises from the Securities and Exchange Commission 2018 settlement with certain executives of UDF IV’s external advisor, including Hollis Greenlaw, who was convicted of fraud in 2022 and sentenced to seven years imprisonment.

In July 2018, the SEC ordered several UDF funds and executives to pay $7.2 million in disgorgement and prejudgment interest, as well as a $1.1 million fine, for misleading investors by failing to disclose that it could not pay its distributions and was using money from a newer fund to pay distributions to investors in an older fund.

The amount was to be deposited into a “Fair Fund” and distributed to investors who owned shares between 2011-2015.

NexPoint filed a complaint in August 2022, according to reporting by The DI Wire, alleging that the defendants used shareholder money to pay their own personal obligations under an SEC settlement and “then lied about it and tried to cover it up” by making it look like the funds came from a “payment” from its largest borrower and owner of Centurion American, Mehrdad Moayedi.

UDF IV and its board failed to disclose that these “disgorgement payments” were actually paid by the company, not the individuals as required by the settlement. The eligible shareholders who recently received their Fair Fund distributions mistakenly believe these funds were disgorged by the adviser’s executives. The disgorgement payments represent, according to NexPoint, “further misconduct and the continued failure by [UDF IV and the board] to protect shareholders’ interests.”

NexPoint argues that the SEC lawsuit was settled by engaging in the “same act that they were being sued for in the first place.” Specifically, “taking UDF IV shareholder money, pretending it was a loan to Moayedi and having him make a corresponding fake payment that defendants used to satisfy…the SEC order.”

NexPoint’s Feb. 8 news release concluded:

“UDF IV’s unconscionable actions have led to defrauded shareholders effectively funding their own settlement payments. This improper disgorgement payment was expressly approved by the Board of Trustees, and, amazingly, was not disclosed even at the time of payment. The recent distribution is not a remedy for defrauded shareholders, but merely a misdirected and undisclosed return of capital that further erodes UDF IV enterprise value. For those who bought shares after 2015, the value erosion is more pronounced, as they were ineligible to receive any distribution, yet bore the cost of the misuse of funds, resulting in further NAV depletion. NexPoint continues to seek recovery of these and other improper indemnification payments through litigation in Texas.”

 “Sadly, but unsurprisingly, UDF IV and its board continue to obstruct NexPoint’s efforts for transparency and accountability, attempting to narrow the scope of litigation and restrict discovery to the detriment of all UDF IV shareholders. The company’s ongoing efforts to stymie shareholder empowerment and obfuscate their improper behavior cannot continue.”

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