NexPoint Advisors, L.P., a Dallas-based alternative investment firm, has filed a motion for preliminary injunction against United Development Funding IV, a real estate investment trust in which NexPoint owns approximately 5.8 percent of the outstanding shares.
NexPoint, which sued UDF IV and its affiliates and executives last month, seeks to prevent the continued improper use UDF IV’s assets to pay legal fees incurred in the appeal of their criminal convictions.
According to NexPoint, Hollis Greenlaw, Theodore Etter, Benjamin Wissink, and Cara Obert have used more than $65 million of shareholder assets to pay their legal fees and indemnification expenses. The other defendants include UMTH General Services (UDF IV’s advisor), UMTH Land Development L.P. (UDF IV’s asset manager), and UMT Holdings L.P.
Earlier this year, four UDF executives were sentenced to a combined 20 years in prison after being convicted on 10 federal counts of securities fraud, wire fraud, and bank fraud. Chief executive officer Hollis Greenlaw was sentenced to seven years. Partnership president Benjamin Wissink and chief financial officer Cara Obert were sentenced to five years each; and asset management director Jeffrey Jester to three years. Greenlaw, Wissink, and Obert were also fined $50,000 each.
In addition, 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.
NexPoint claims that the defendants “are using their status within the advisor to cause UDF IV to pay their significant legal fees in connection with the criminal case and possibly other litigation.” NexPoint believes this practice continues to this day as the three felons are appealing their convictions but using UDF IV to pay for their lawyers.
“The UDF ‘web of companies’ has been set up in a purposefully complex and obtuse manner in order to maximize control in the hands of a few individuals (the individual defendants) while hiding their operations,” said D.C. Sauter, general counsel at NexPoint. “The Defendants have engaged in egregious acts of misconduct and despite their convictions continually seek to benefit themselves at the expense of shareholders, with the active consent of UDF IV independent trustees. On behalf of fellow shareholders, we believe the time has come to put an end to this outrageous behavior.”
UDF IV’s activities are controlled, managed, and conducted by UMTH General, its advisor, and by the advisor’s officers and employees, including the individual defendants.
According to NexPoint, the advisory agreement states that UMTH General has a fiduciary relationship with the UDF IV shareholders and prohibits indemnification for allegations of securities law violations except in limited circumstances not applicable in this case.
NexPoint’s motion seeks to put a stop to defendants requesting and using indemnification from UDF IV to cover “significant” legal fees and expenses in connection with the criminal case and possibly other litigation.
Plaintiffs in the case are NexPoint Diversified Real Estate Trust (NYSE: NXDT), a publicly traded REIT formerly known as NexPoint Strategic Opportunities Fund (NYSE: NHF), and its wholly owned subsidiary, NexPoint Real Estate Opportunities LLC.
NexPoint Advisors is an SEC-registered adviser on the NexPoint alternative investment platform. It 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.