United Development Funding’s family of funds have filed a lawsuit in a Texas court against well-known hedge fund manager Kyle Bass and his Hayman Capital hedge funds which held a short position in one of UDF’s entities. UDF is the sponsor of several non-traded real estate investment trusts, as well as a traded REIT, United Development Funding IV (NASDAQ: UDF).
The lawsuit claims that the UDF funds were financially damaged due to statements made by the defendants, including that the funds operated as a Ponzi scheme. UDF believes that Bass and his funds raked in profits of an estimated $60 million or more as a result of their short position.
As reported by The DI Wire in late 2015, Bass anonymously authored and posted a series of online reports on an investor networking website that detailed unsubstantiated claims against UDF that sent stock prices plummeting.
It was later revealed that Bass and Hayman Capital were shorting UDF IV after he launched the website www.UDFexposed.com which disclosed that “Hayman will profit if the market price for common shares of UDF decline and, conversely, Hayman will lose money if the market price increases for the common shares of UDF.”
Bass’s Hayman Capital hedge funds focus primarily on short-selling stocks, or betting that a company’s stock price will decline. Bass is best known for betting against subprime mortgages and securing massive profits for himself in 2008 following the housing market crash.
The complaint argues that Bass was under pressure to hit another big payout after a series of losses and made UDF his target, engaging in an illegal “short-and-distort” scheme where a “short seller spreads false and damaging information about the target company it is betting against in order to harm the business and its stock price.”
UDF alleges that Bass spread false information directly to its business partners, including lenders, borrowers, accountants, companies, with the sole purpose of driving down its stock price. For example, Bass accused UDF’s largest group of borrower entities, Centurion, of being insolvent and a participant in the fraudulent scheme.
Following the Ponzi scheme claims and subsequent reports, UDF said that it lost access to credit and capital markets and was forced to sell its assets at reduced prices and to pay off many of its loans. The company also noted that it lost builder and developer customers and future investors, which allegedly caused damages in the hundreds of millions of dollars.
In December 2015, UDF disclosed that it was the subject of a non-public fact-finding SEC investigation that started in April 2014, and a few months later its Grapevine, Texas headquarters was raided by the FBI.
UDF believes that Hayman’s general counsel Christopher Kirkpatrick, a former branch chief of the SEC’s enforcement division, contacted his old employer, as well as the FBI and the United States Attorney’s Office in Dallas “to prompt those agencies to take some public action against UDF that defendants understood and hoped would spook investors.”
Since listing on NASDAQ in June 2014 until December 2015, UDF IV had traded in a range of $16.02 to $19.95 per share. By mid-February 2016, UDF IV traded below $4 per share, before trading was halted by NASDAQ. The company was delisted in October 2016 for failing to file its 2015 annual financial reports and subsequent quarterly reports with the SEC.
UDF alleges that the delisting was part of Hayman Capital’s plan to buy discounted shares of UDF IV in the over-the-counter market from institutional investors, since UDF IV was no longer in the Russell 2000 Index.
The UDF funds had previously raised more than $1.2 billion in investor capital between 2003 and December 2015. UDF V, a non-traded REIT seeking to raise $1 billion, terminated its offering in March 2016.
The complaint alleges multiple counts including business disparagement, tortious interference, civil and conspiracy. Plaintiffs demand a trial by jury on all issues and seek monetary relief in excess of $1 million for damages, disgorgement, pre-judgment interest, attorney’s fees, and other relief.