[Post Updated July 2019] Texas REIT company United Development Funding (UDF) has suffered much turmoil recently. This week the company announced it had received a Wells notice from the SEC. Named after the former chair of an SEC committee, a Wells notice is a notification letter sent by the agency to a person or securities firm. The notice is an indication that the agency has determined it may bring a civil enforcement action against them. In this case, the notice was directed at the company. If that isn’t enough bad news, the NASDAQ previously delisted shares of one of the company’s real estate investment trusts, UDF IV.
Troubles for United Development Funding began in December of 2015 when a hedge fund accused the company of being a Ponzi scheme. In February things got worse after the company’s headquarters was raided by the FBI.
The NASDAQ actions concern a specific United Development Funding REIT, UDF IV. That fund began in 2009 as a nontraded REIT and later became listed on the exchange. (We have long warned that nontraded REITs are a particularly bad investment for retirees and those needing short term access to their money.)
After the raid in February, the company said it was working to get the company’s financial reporting in order. Not only didn’t that happen, we now know from a form 8-K just filed that the company expects an enforcement action from the SEC.
Already over 200 hundred holders of various UDF REITs have hired lawyers to sue the company. Many investors report that they are not receiving distributions and that a number of different United Development Funding REITs have stopped paying dividends.
We expect that suits against the company won’t be very successful. If it is a Ponzi scheme, the money may be long gone. Many of the investors purchased their shares from stockbrokers and other investment professionals. Luckily the brokers selling these products can often be held responsible for any losses.
Stockbrokers and the firms that employ them have a duty to perform due diligence on the companies they recommend. Many, however, farm that duty to others and don’t thoroughly check out the products they recommend. Others are more interested in the high commissions typically paid by REITs and especially by nontraded REITs.
In recent years we represented over 100 investors in various tenant-in-common deals sold by Carlton Cabot. Most of them went belly up. More importantly, many of the brokerage firms that sold them went under too.
What is the point of this post? If you are holding shares in any United Development Funding product, don’t wait another day to take action. Often we hear from investors years after a scheme or scandal first breaks. By then it is often too late. The deep pockets are out of business.
Why do people wait?
There are a number of reasons why people wait. Some people hope that the SEC or some regulatory body will swoop in and collect their money. Others are simply too busy. And often, the same brokers that sold these products are telling their customers to ride out the storm. Why? Because by doing so, they are letting the statute of limitations (time period in which one must bring a claim) to lapse!
We hope the scandal and allegations revolving around UDF have a happy ending. History tells us, however, that it probably won’t. If you have invested in any United Development Funding investment, call us immediately. Invested in some other nonperforming Real Estate Investment Trust? We may also be able to help.
In July 2018, the SEC filed formal charges against UDF and five of its executives for misleading investors about the source of revenues involving two UDF funds
According to court records, the SEC claims that United Development Funding failed to disclose that it was using investment money from a newer funds to pay distributions due by older funds. They also say the CEO, Executive Vice President and the fund’s Chairman “knew or should have known”of the misrepresentations.
UDF’s chief accounting officer was also charged.
The SEC filed the case and simultaneously announced a settlement. The company wasn’t fined but the executives were ordered to cough up $8.2 million in penalties.
The settlement did not stop a continuing FBI probe.
“UDF solicited investments by allegedly touting consistent investment returns,” said SEC Fort Worth Regional Director Shamoil Shipchandler. “But instead, as we allege, the family of funds and its executives concealed the economic reality of UDF’s business operations and masked the fact that payments to investors in an earlier fund came from a newer fund.”
The executives were allowed to settle without any admission of wrongdoing.
Although United Development Funding settled SEC charges, they claim they are the victims of a vicious short selling attack. UDF filed suit against several hedge funds they say were behind the attacks. In the typical short selling attack, a person or fund sells the company’s stock “short” and then spreads negative information to drive down the price of the stock. UDF says the short sellers falsely claimed the company was insolvent and a Ponzi scheme.
Was the FBI probe the result of rumors started by short sellers? Or did the short sellers have legitimate concerns from the actions of the FBI and SEC? We don’t yet know.
For more information, visit our investor fraud recovery page. If you have specific questions or want to bring your own claim, contact attorney Brian Mahany at or by phone at (direct). Most investment fraud recovery actions are handled on a contingent fee basis meaning we never charge unless we recover money for you.
MahanyLaw – America’s Stockbroker Fraud Lawyers