FBI raids Grapevine offices of United Development Funding

The FBI raided the headquarters of United Development Funding on Thursday, signaling a criminal investigation of the real estate investment firm that has been accused of operating like a Ponzi scheme.

The raid began mid-morning, and agents were seen carrying boxes out of the building on Municipal Way by early afternoon, according to television news reports.

Thomas M. Class, special agent in charge of the Dallas FBI office, would say only that the agency was “conducting law enforcement activity.”

Shares of United Development Funding IV, a publicly traded unit of the firm, sank more than 50 percent to $3.20 a share before trading was halted.

Over more than a decade, UDF has made more than $1 billion in secured loans to residential developers under the guidance of CEO Hollis Greenlaw. It is organized in a web of more than a dozen corporate entities, with UDF IV fund as its only publicly traded unit.

But since mid-December, the company has been pressured by accusations by Dallas hedge fund operator Kyle Bass. First in anonymous posts online and later on a website titled udfexposed.com, Bass has called UDF “a billion-dollar house of cards” with the characteristics of a Ponzi scheme, using money raised in new funds to replenish and pay investors in its older funds.

Earlier this month, Bass acknowledged that his Hayman Capital Management was shorting UDF IV stock, meaning that he would make money if it declined in value. And the stock has sunk about 80 percent since the accusations first hit the Internet.

In a December SEC filing responding to what it called the “hedge fund attack,” UDF called the accusations “misleading” and consistent with “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 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.

In subsequent weeks, three shareholder lawsuits were filed in U.S. District Court in Fort Worth, saying that the company deceived investors. Citing information put forward by Hayman Capital, the lawsuits say that UDF failed to disclose that UDF IV provided liquidity to earlier companies, such as UDF I, UMT and UDF III.

“If the funding mechanism funneling retail capital to the latest UDF company were halted, the earlier UDF companies would not be capable of standing alone, and the entire structure would likely crumble with investors left holding the bag,” the lawsuit alleges.

This story was originally published February 18, 2016 at 1:20 PM with the headline "FBI raids Grapevine offices of United Development Funding."