In July 2018, the Securities and Exchange Commission (SEC) charged two real estate investment (REIT) funds, which are among those in Texas-based United Development Funding (UDF), and four executives and ordered them to pay $8.2 million in fines and payments to investors for failing to disclose that it could not meet its distribution payments. The SEC also charged a fifth executive for allegedly signing false SEC filings.
A REIT is a company, modeled after mutual funds, that owns or finances income-producing real estate and provide investors of all types regular income streams, diversification and long-term capital appreciation. Unlike other real estate investments, REITs are often entirely illiquid. Non-traded REITs hold additional risks for investors because they often feature limited redemption programs, high fees and commissions, and internal conflicts of interest.
UDF is a family of private and publicly-traded investment funds that deploys investor capital as loans to homebuilders and land developers. According to the SEC complaint, UDF allegedly solicited investors by advertising annualized returns of up to 9.75 percent as well as regular distributions. However according to the complaint, during almost a five-year period, UDF did not tell investors that it lacked the monthly cash flow at times to cover investor distributions in one of its older funds, UDF III. “Instead, to pay these distributions, the newer 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. In most of these cases, 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.”
It is alleged that UDF III, UDF IV, and UDF executives Hollis Greenlaw, Benjamin Wissink, Theodore Etter, and Cara Obert knew or should have known that they had misled investors about the use of funds and the nature and status of loans made to developers. Greenlaw, Wissink, Etter, and Obert agreed to pay $8.2 million in disgorgement, prejudgment interest, and civil penalties. David Hanson, the chief accounting officer at UDF IV, agreed to pay a $75,000 civil penalty.
The complaint alleges that David Hanson signed false and misleading SEC filings and management representation letters without taking sufficient actions to ensure the accuracy of or a sufficient basis for many of their representations.
In February 2016, the FBI raided the Dallas offices of UDF IV.
Erez Law is investigating brokers and brokerage firms that sold UDF investments to their clients. Brokerage firms are responsible for doing due diligence on investments they offer to their clients. Brokers are responsible for making suitable recommendations. Furthermore, pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms around the country may be liable for investment or other losses suffered by its customers.
Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If and have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.
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