The CEO of North Texas-based residential real estate development lender United Development Funding and three of his colleagues were found guilty late this afternoon on securities fraud, wire fraud and conspiracy charges.
Jurors deliberated for nearly two days after a one-week trial in which U.S. District Judge Reed O’Connor put strict time limits on the federal prosecutors and defense attorneys to present their side of the case.
Hollis Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, stood trial alongside 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.
The executives were convicted on all counts. Lawyers for the defendants said they plan to appeal the jury’s decision.
The four UDF executives were accused of an alleged scheme to defraud the investing public, shareholders and banks using funds that provided more than $1 billion in loans to developers of residential housing communities and, to a lesser extent, homebuilders.
Prosecutors in the Northern District of Texas charged the UDF executives with conspiring to illegally shift investment dollars in three of its different funds to deceive banks and investors and enrich themselves.
In closing arguments this morning, assistant U.S. Attorney Tiffany Eggers, the lead prosecutor, told the jury that the UDF executives “engaged in a large-scale scam and they did it month after month.”
“The defendants had to choose failure or fraud, and they chose fraud,” Eggers said.
Paul Pelletier, who represents Greenlaw and Grapevine-based United Development, said UDF’s business is so complex that the government investigators and prosecutors don’t understand it, and they never truly tried.
“The government got it wrong,” he said.
Throughout the trial, Eggers, hammered away at that argument, while defense lawyers attempted to convince jurors that the evidence and testimony presented fell short and left room for reasonable doubt at the very least.
Eggers argued that transfers made between the REIT’s funds are illegal and were a reaction to shortfalls that arose when developers were slow to repay money they borrowed from UDF.
The defense lawyers said their clients individually and UDF as a company broke no laws. Prosecutors and government regulators who investigated the case don’t understand the residential development process and the way housing communities are financed and constructed in phases, lawyers for the executives claimed.
Neal Stephens of law firm Jones Day, who represents Obert, also said no investors lost money in his closing argument.
“What’s completely lacking in this case is any evidence that any of these people did anything to harm any investor,” he said.
At the outset, the FBI thought they were investigating a billion-dollar Ponzi scheme, and when their findings didn’t match those expectations, the government refused to be open to the far less interesting truth, the UDF executives’ lawyers argued.
UDF has a family of five public and private funds: UDF I, II, III, IV and V. Each aims to give investors differently tailored opportunities to diversify their portfolios with investments in residential real estate.
The firm created UDF III to originate, acquire and manage a portfolio of mortgage loans or equity interests in various real estate investments.
A separate entity called UDF IV was later created as a loan facility for developers of single-family homes and mixed-use community developments.
When UDF III borrowers became slow to pay their obligations, UDF executives began using fund IV capital for fund III obligations, according to prosecutors. Between January 2011 and November 2015, more than $65 million in cash raised by UDF IV was used to pay investors in UDF III a return on their money, as well as other corporate expenses, according to the indictment.
Eggers implored the jury of seven women and five men to pore over the thick binders and digital copies of bank account statements, emails between UDF employees and developers outside the company, and other evidence. She also asked the jury to ignore the argument that UDF has a good working environment, which multiple witnesses — most testifying at the prosecution’s behest — emphasized during the trial.
“Nowhere in the jury instructions does it say, ‘If everyone enjoys their job, it’s not a crime,” Eggers said.
Pelletier ended his argument thusly: “There is insufficient evidence to prove any of this,” he said. “Let these people go back to their jobs.”
SUMMARY OF CHARGES
The indictment alleges that the defendants were part of a scheme to defraud and conspiracy, ending in 2015, in connection with the business operations of United Development Funding:
- Count 1: Conspiracy to commit wire fraud affecting a financial institution
- Count 2: Conspiracy to commit securities fraud
- Counts 3 through 10: Substantive counts of securities fraud