Shifting money from one investment fund to another within the same family of funds to pay distributions to investors isn’t proper, a former director of embattled United Development Funding testified Friday in the trial of four top company executives charged with securities fraud and conspiracy.
William Kahane was on the Board of Directors of UDF V, one of the Grapevine-based REIT’s funds, until resigning in November 2015.
Kahane, a self-described real estate entrepreneur and a founding partner in real estate finance firm AR Capital, has served on many boards of directors through the years. He testified in the third day of the high-profile white-collar trial.
Transactions between affiliated companies or funds — such as the transfers that UDF is accused of making — are required to be disclosed to the Securities and Exchange Commission, and the relationship between the funds or companies involved has to be described in detail, said Kahane, who was called to the witness stand by federal prosecutors.
Kahane resigned before United Development allegedly transferred millions of dollars from UDF V to UDF III in a move to allow fund III to pay a 9.75% monthly distribution to its investors, prosecutors claim.
“You don’t borrow from an affiliate to go about paying distributions,” Kahane said.
Hollis Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, along with three other controlling executives of the REIT, are charged in an alleged plot to cheat investors and banks using funds that provided hundreds of millions of dollars in loans to residential housing developers.
According to the company, more than $1 billion in loans provided through UDF funds have financed 246 residential developments with a total of over 90,000 lots across North Texas and the Houston, Austin and San Antonio areas.
Some of the larger projects in North Texas include the 448-acre Valencia on the Lake master-planned community in Little Elm, the 300-acre Frisco Hills master-planned community, and Sendera and the Villages of Woodland Springs in north Fort Worth.
A 10-count indictment made public Oct. 15 claims that from 2011 through 2015, Greenlaw, UDF partnership president and committee member Benjamin Lee Wissink, UDF chief financial officer Cara Delin Obert and UDF director of asset management Jeffrey Brandon Jester schemed to defraud the investing public and shareholders.
The executives conspired to illegally commingle investment dollars in three of its different funds to deceive banks and investors, prosecutors in the Northern District of Texas allege.
The UDF executives say the charges are without merit.
Investors in UDF’s five funds were led to believe that developers of large housing communities, who obtained loans from the funds, would be required to pay back the loans with interest and that interest income would then be used to pay distributions to investors, according to the indictment. But developers were not repaying loans obtained from the early funds quickly enough, leading to the creation of subsequent funds and the tapping of money kicked in by later investors to pay distributions to earlier investors, prosecutors contend.
Jurors on Friday also heard from Mike Wilson, president of UDF Holdings, who testified about the size and capital-raising record of UDF funds.
Wilson, who was called by the prosecution to testify, said on cross-examination that he has “never lost confidence” in UDF’s management, despite the current trial and hardships brought on by a six-year investigation and an FBI raid of the company’s headquarters.
UDF III, intended to be a $250 million offering, raised $330 million, Wilson said.
UDF IV, a $550 million offering, was also oversubscribed, raising $615 million, he said. Fund IV was then listed on the Nasdaq so that more investors could participate, Wilson said.
UDF V was created in early 2015 with a maximum offering of $1 billion. Through December 2015, about $4.5 million had been used to pay off UDF III investors, according to the indictment.
In an even bigger shift between funds, more than $65 million raised by UDF IV was used to pay investors in UDF III, prosecutors allege in the indictment.
Jurors also heard the testimony Friday of auditors from UDF’s onetime accounting firm, Whitley Penn.
In November 2015, around the same time Kahane resigned, Whitley Penn declined to stand for reappointment as the auditor for each of the various UDF companies.
The trial resumes Tuesday in Fort Worth.