United Development Funding IV, a publicly traded real estate investment trust (OTCMKTS: UDFI), has disclosed that a federal court in Texas has preliminarily approved a proposed settlement stemming from an investor lawsuit that accused the company of breach of fiduciary duty, unjust enrichment, and aiding and abetting.
UDF IV is one company within the United Development Funding family of funds that include the non-traded limited partnership United Development Funding III L.P. and non-traded REIT United Development Funding V.
In early 2016, hedge fund manager and founder of Hayman Capital Management, Kyle Bass, publicly accused the REIT of operating a “Ponzi-like real estate scheme,” by using new investor money to pay existing investors. Hayman held a short position in the company’s common stock.
Less than two weeks after the accusations were revealed, the FBI raided UDF’s corporate office and seized multiple boxes from the premises. UDF has vehemently denied the Ponzi allegations and has since sued Hayman Capital and Bass.
Defendants in the shareholder lawsuit include UDF IV; chairman and CEO Hollis Greenlaw; independent trustees Philip Marshall, J. Heath Malone, and Steven Finkle. The complaint also named the REIT’s advisor UMTH General Services LP; its asset manager UMTH Land Development LP; and Todd Etter, executive vice president of the asset manager and chairman of UMT Services Inc., the general partner of the asset manager and advisor.
In the complaint, plaintiff Richard Evans alleged that the board allowed UDF IV to engage in related-party transactions that were against company policy and “detrimental” to the company. Specifically, the plaintiff alleged that UDF IV had been permitted to pay “excessive sums” to entities owned and/or controlled by Greenlaw.
The plaintiff claimed that a lack of board oversight resulted in UDF IV operating in a manner similar to that of a Ponzi scheme, and that the board allowed the company to become overly concentrated on a limited number of borrowers. Lastly, UDV IV is accused of paying its advisor and asset manager “improper and/or inflated advisory or management fees to which they were not entitled.”
UDF IV believes that the plaintiff’s claims are without merit, and agreed to the settlement “to avoid the distraction and expense of defending the lawsuit through trial.”
The settlement maintains that the defendants will deposit $1.5 million into an escrow account to be used to pay any attorney’s fees awarded to the plaintiff and to implement certain governance measures.
These measures, which must be implemented for three years, include adding a new independent trustee to the board who must qualify as an audit committee financial expert as defined by the SEC.
In addition, the new trustee must have had at least three years of relevant real estate experience at a public company. The new trustee will serve as chairman of the audit committee to be appointed before the company’s next annual stockholder meeting.
UDF IV agreed to appoint a new chief compliance officer for UDF IV and United Development Funding V, and potentially other affiliated entities, who will report directly to the audit committee.
The company also agreed to revise its related-party transaction policy, as well as other stipulations that include director training and an enhanced whistleblower policy.
The proposed settlement is subject to final approval at a hearing which is currently scheduled to take place on April 16, 2018 at 9:00 a.m. before Judge Barbara Lynn in the United States District Court for the Northern District of Texas.
UDF IV previously traded on NASDAQ under the ticker “UDF” from June 2014 until December 2015. The company was delisted in October 2016 for failing to file its 2015 annual financial reports and subsequent quarterly reports with the SEC.