UDF says it will cooperate with government probe after FBI raid

Executives at United Development Funding were served with grand jury subpoenas seeking company documents last week as FBI agents raided the investment firm’s Grapevine headquarters.

In a filing with the Securities and Exchange Commission, UDF IV — the company’s publicly traded real estate investment trust — said that it “intends to cooperate fully with the government’s investigation,” adding that it “cannot, however, predict what additional action, if any, government authorities might take in the future.”

The FBI raid at the UDF headquarters, located on Municipal Way off Main Street in Grapevine, followed allegations leveled by a Dallas hedge fund that the investment firm is operating a “Ponzi-like real estate scheme” across its multiple funds. The hedge fund, Hayman Capital Management run by Kyle Bass, that made those initial accusations acknowledged that it was shorting UDF stock, which means it would make money if the price declined.

On a website udfexposed.com, Bass lays out his case against UDF in detail, alleging that it has been using money raised in new funds to pay investors in older funds, and covering up losses on real estate loans with accounting maneuvers within a complex web of inter-related companies. Bass contends that the company is “on the verge of collapse.”

Founded in 2003, UDF has made more than $1 billion in secured loans to residential developers. About two-thirds of its lending activity has been in North Texas, with its top borrower being Centurion American, a major North Texas residential developer based in Farmers Branch. UDF operates more than a dozen corporate entities and took its UDF IV fund public in 2014.

In an SEC filing responding to what it called the “hedge fund attack,” UDF said the accusations are “false and misleading” and part of a “short and distort scheme.” But it also disclosed that it had been the subject of a “fact-finding investigation” by the SEC since April 2014. It said the SEC had informed the company that the investigation was “not an indication of any violations of law” and said it had not been accused of any wrongdoing.

In November, the company disclosed that Whitley Penn had declined to be reappointed as the company’s independent accounting firm but said there had been no disagreement on accounting issues.

Trading in shares of United Development Funding IV, which were priced above $17 a share before the allegations went public in December, was halted on the Nasdaq exchange Thursday when news of the raid became public. The stock (ticker: UDF) last traded at $3.20.

In its SEC filing, UDF said “no assurance can be given regarding the resumption of the trading.”

Three shareholder lawsuits have been filed in U.S. District Court in Fort Worth, alleging that the company deceived investors.

This story was originally published February 22, 2016 at 10:32 AM with the headline "UDF says it will cooperate with government probe after FBI raid."