United Development Funding and its investment platforms have been under attack for a few years. It looks it has finally come to grips with its mistakes. UDF is closing out investigations into its funding of real estate investments from multiple investment platforms.
The attacks started in 2015 when Kyle Bass, who runs Dallas-based hedge fund Hayman Capital Management LP, bet against UDF IV shares and publicly raised questions about UDF. Bass called the company a billion-dollar house of cards and a Ponzi Scheme, using newly raised capital to pay off old investors. Bass detailed projects that were funded for more than a decade without any noticeable development, projects without impairments being recorded and loans being paid off without an obvious cash flow.
Bass noticed the October 2014 that the UDF III partnership, a non-traded, publicly registered REIT announced that it had formed a special committee comprised of independent advisors to evaluate potential strategic alternatives.
Then in February 2016, the FBI raided the offices of UDF. There were internal investigations, a threatened delisting by NASDAQ and an SEC investigation. The SEC just announced settlement of its case.
So what happened?
UDF III had loans to developments were stalled and the developers lacked capital re-pay the loans. UDF IV fund loaned money to developers who had also borrowed money from UDF III. Rather than using those funds for development projects that were underwritten by UDF IV, UDF directed the developers to use the loaned money to pay down their older loans from UDF III. Even worse, in some instances, the developer never received the borrowed funds at all, and UDF simply transferred the money between funds so that UDF III could make the distributions to its investors.
This is an example of the dangers posed by transactions between investment platforms. It looks like a Ponzi scheme. The additional problem was the lack of disclosure, the failure to right down the UDF III loans and UDF IV’s improper treatment of its capital deployment.
The investigations do not point to fraud in that UDF or its executives were pocketing the cash improperly. Certainly the fundraising for UDF IV would have been less successful if investors knew the capital was in part being used to fund investments by UDF III.
What UDF did with funding would not have been a problem if it has disclosed the information. Instead UDF hid the problem by not fully disclosing the inter-platform transactions and not writing down the value of the UDF III investments.
Sources:
- SEC Charges Real Estate Investment Funds and Executives for Misleading Investors
- SEC Complaint against United Development Funding III, LP, United Development Funding IV, Hollis M. Greenlaw, Benjamin L. Wissink, Theodore F. Etter, Cara D. Obert, and David A. Hanson
- FBI Raids Headquarters of United Development Funding
- udfexposed.com
- The Red Flags at United Development Funding
- Grapevine lender UDF’s execs pay more than $8 million after SEC sues for misleading investors
- Hayman Litigation Updates
