A feud pitting United Development Funding and CEO Hollis Greenlaw against Dallas hedge fund manager Kyle Bass and Hayman Capital Management isn’t as legendary or vindictive as the vendetta between the Hatfields and McCoys, the Montagues and Capulets, or Aaron Burr and Alexander Hamilton.
But a bitter business rift between the Grapevine-based real estate investment trust and the short-seller who bad-mouthed the REIT to sink its stock price may have spurred an intensive federal investigation of UDF. Which led to grand jury indictments and prosecution of Greenlaw and three of his colleagues at UDF. Which led to a trial that resulted in the four UDF executives’ convictions last month on securities fraud and other federal charges.
Or, at least, that’s the picture painted by lawyers for the UDF officers in recent court filings.
In the January trial, Greenlaw, who is co-founder and chairman of residential development lender UDF’s board of trustees in addition to his role as CEO, was found guilty on 10 counts, including securities fraud, wire fraud affecting a financial institution and conspiracy to commit securities fraud. Cara Delin Obert, UDF chief financial officer; Jeffrey Brandon Jester, UDF director of asset management; and Benjamin Lee Wissink, UDF partnership president and committee member, were convicted on the same 10 counts.
All four were found guilty of every count they faced.
Jurors in the trial heard no mentions of bad blood between UDF and Bass. If they had, there’s a good chance the verdicts would have been different, lawyers for the UDF executives argue in post-trial motions.
U.S. District Judge Reed O’Connor, who presides over the case, including sentencing scheduled for this spring, erred in his decision to prohibit the four UDF officers from introducing evidence about Bass’ role in the investigation and prosecution of the codefendants, according to a motion filed by defense attorney Paul Pelletier. As a result, the guilty verdicts reached last month should be invalidated and the executives should get a new trial, Pelletier’s motion argues.
Picking a fight
The brouhaha between Bass, chief investment officer of Hayman Capital, and UDF goes back to at least 2015 when Bass published an anonymous blog post warning that UDF was on the brink of collapse and accusing the company’s family of funds of operating as a Ponzi scheme.
The hedge fund manager accused the REIT’s executives of using newer investor money from a fund known as UDF IV to pay dividends to shareholders in an older fund, UDF III.
Bass, in a later letter on the Hayman-sponsored website “UDFExposed” and elsewhere, also revealed what he saw as regulatory violations by UDF that never showed up in a Securities and Exchange Commission case against UDF resulting from an SEC investigation of the residential development lender’s business dealings.
For starters, Bass and Hayman Capital accused UDF’s managers of engaging in transactions with a large borrower that weren’t “arm’s length.” In addition, the hedge fund manager and Hayman alleged that a separate UDF-affiliated REIT made loans to companies controlled by UDF executives then improperly valued those loans when they weren’t repaid.
UDF shot back that Hayman’s claims were wrong and amounted to market manipulation. They contended at the time and continue to argue that Bass made intentionally false statements about UDF — while sprinkling in elements of truth — to drive down the share price of the publicly traded REIT that Hayman was shorting.
The price of the stock in the UDF fund that Hayman was shorting plummeted on Bass’ research, and the shares fell further after the FBI in 2016 raided UDF’s headquarters in Grapevine following Bass’ accusations.
A civil lawsuit followed, with UDF claiming that Bass’ and Hayman Capital’s allegations were false and designed to sink their stock price.
Bass and Hayman deny those claims, countering in the civil suit documents that his and his firm’s commentary about UDF is protected by the First Amendment and was intended to warn potential investors against sinking money into a disreputable company.
Bass celebrated the UDF executives’ conviction in the criminal case, sharing his thoughts on the guilty verdicts in this tweet:
“7 years ago, we alerted the SEC, the FBI, and the US Attorney to Hollis Greenlaw and United Development Funding’s enormous financial fraud. After the jury’s verdict was read yesterday evening, Hollis and his criminal team were immediately handcuffed and thrown in JAIL.”
Ruling Bass out
Early on, O’Connor, at the prosecution’s request, ordered that evidence and testimony regarding Bass and Hayman Capital connections with UDF be excluded because the judge ruled it essentially a sideshow that could confuse and distract jurors from the primary issues at hand. O’Connor stuck to that decision toward the end of the trial when Pelletier and lawyers for the other defendants asked him to reconsider.
Pelletier’s post-trial motion says O’Connor’s ban on bringing up Bass’ role compromised the UDF executives’ case by impeding the defense’s ability to challenge the integrity of the investigation and prosecution. The motion says the government, in essence, worked in cahoots with Bass and Hayman in the evidence gathering and prosecution of the case — a claim the government denies.
Bass used the government to further what the UDF executives call a “short and distort” campaign to sabotage UDF’s stock price and make millions of dollars for Bass and Hayman Capital’s investors at the REIT’s expense, UDF court documents claim.
Bass delved into UDF’s business dealings and pushed his findings on federal regulators, pressuring them to act, according to Pelletier.
“Bass purposefully sought to enlist the government’s assistance so that he could profit from harming UDF’s investors and illegally acquire UDF’s assets,” Pelletier wrote in an emailed response to questions from the Dallas Business Journal.
Having the ability to present the Bass/Hayman history would have allowed Greenlaw, Obert and Jester, who testified in the trial, to give their accounts of the motivation for the SEC probe, the FBI raid and investigation, and describe to the jury what they felt were mistakes made by the government in those probes and in the prosecution of the case, Pelletier’s motion says. The full story was necessary to provide context for the jurors to make a fair decision, he says.
Pelletier also said he could have pointed to Bass and Hayman’s involvement in cross-examination to impeach testimony from Scott Martinez, a fraud examiner on the FBI’s complex financial crime squad and a key witness for the prosecution.
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