NexPoint Sues UDF IV Advisors and Executives over “Massive Multi-Year Deception”
NexPoint Advisors L.P., a Dallas-based alternative investment firm, has filed a new complaint in a Dallas district court related to United Development Funding IV
NexPoint Advisors L.P., a Dallas-based alternative investment firm, has filed a new complaint in a Dallas district court related to United Development Funding IV, a real estate investment trust in which NexPoint owns approximately 5.8 percent of the outstanding shares. The remaining shares are owned by an estimated 30,000 shareholders, mostly retail investors.
Defendants in NexPoint’s lawsuit include UMTH General Services (UDF IV’s advisor), UMTH Land Development L.P. (UDF IV’s asset manager), UMT Holdings L.P., and executives Hollis Greenlaw, Todd Etter, Ben Wissink, and Cara Obert.
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.
NexPoint said that its lawsuit is part of “ongoing efforts to protect its interests alongside the other UDF IV shareholder interests by seeking transparency and holding accountable the fund’s management to act in accordance with its fiduciary duties.”
“This lawsuit seeks to hold accountable those individuals and entities that have perpetuated the massive multi-year deception and fraud that is the United Development Funding ‘investment’ program,” the complaint states. “The defendants ran UDF’s consecutive ‘investment’ funds as a Ponzi scheme; sought to cover it up through an endless series of fake loans and payments; paid themselves millions of dollars in improper fees; lied to investigators about it; got caught by the SEC and were ordered to disgorge profits and pay fines;…were indicted by a federal grand jury on 10 counts of securities, wire, and banking fraud that covered an extended period of time; tried to save themselves by spending $65 million or more of shareholder funds on legal fees, costs and payments; never disclosed to shareholders their massive expenditure of shareholder funds on their individual defense; were convicted on 10 counts of securities, wire, and banking fraud, and still expect the shareholders to pay their legal fees while they refuse to return any of their ill-gotten profits.”
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’s complaint alleges 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, Mehrdad Moayedi, owner of Centurion American, who purportedly owes UDF in the ballpark of $1 billion.
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.”
In addition, NexPoint claims that UDF’s current management “refuses to do anything” about the bad acts of its prior management, calling them “one and the same.”
“While one would think that criminal convictions of UDF’s top executives (three of whom are defendants in this case) would force UDF’s ‘remaining’ management to re-examine its prior practices and seeks repayment from the UDF wrongdoers for the damage they caused and the legal fees they improperly made the shareholders pay, that has not happened,” Nexpoint said in the complaint.
NexPoint further alleges that UDF IV has refused to provide financial information to shareholders since November 2015 or hold an annual shareholder meeting. It has been seven years since the last trustee election, and one of the current trustees has never been elected by shareholders.
“In light of this pattern of never-ending improper behavior, it is high time that those who operated and participated in the UDF web of corruption be held responsible for their brazen acts of fraud and breach of fiduciary duty,” said NexPoint. “This lawsuit seeks to do just that.”
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.
