A new judge has been assigned to oversee the upcoming trial of the CEO and three other executives of a North Texas real estate fund charged in an alleged plot to cheat investors and banks using funds that provided loans to residential housing developers.
In addition to the handoff to a new judge, several motions were filed late last week in the criminal case against CEO Hollis Greenlaw and three other top executives of Grapevine-based United Development Funding, or UDF.
Federal prosecutors in the Northern District of Texas claim in an indictment made public last month that the four UDF executives conspired to improperly use investor money, defraud banks and hide the true financial condition and performance of UDF funds from shareholders, the investing public, external auditors and the U.S. Securities and Exchange Commission.
The defendants pleaded not guilty at their initial appearance in federal court in Fort Worth last month.
The allegations date back nearly a decade and involve dollar figures high enough to rank it among the nation’s largest financial fraud cases.
From early 2011 through the end of 2015, prosecutors allege that Greenlaw led a scheme to defraud the public and others through various fund entities presented as companies that would provide loans to housing developers who needed money to build residential communities. According to the indictment, investors were led to believe that the developers who obtained loans from the fund entities would be required to pay back loans with interest and that proceeds would be used to pay distributions to investors.
However, when developers were not repaying loans obtained from one of the funds quickly enough, Greenlaw and the other defendants began raising money through a subsequent fund that was also supposed to be set up to provide loans to developers, federal prosecutors claim. Instead of using the money for real estate lending, proceeds from the latter fund’s investors were used to repay loans previously issued to developers through earlier funds and to pay distributions to investors in earlier funds, according to allegations at the heart of the indictment.
According to the document, in addition to misleading investors, the alleged scheme defrauded multiple banks that were not identified by name in the indictment.
“To encourage investment and enrich themselves, Greenlaw and other UDF managers sought to defraud investors and obtain money from banks by failing to disclose that shareholder funds were being used to repay developer loans and issue distributions to earlier investors,” the indictment reads.
Documents filed last week shed light on how federal prosecutors plan to attempt to prove their case and how lawyers for the accused executives plan to defend them.
A new judge
The UDF case has been transferred to a new judge, according to an order signed Nov. 4 by U.S. District Judge Terry Means, who had the initial assignment. Judge Reed O’Connor will now preside over the proceedings.
Means made the switch “in light of several upcoming trials” on his docket, according to his order.
O’Connor is perhaps best known as the judge who deemed the Affordable Care Act unconstitutional after a Texas-led coalition of 20 states sued in 2018 to kill it. That ruling was later reversed by the U.S. Supreme Court.
In addition to ruling against Obamacare, O’Connor, a George W. Bush appointee, threw out a federal voting rights lawsuit against the city of Farmers Branch and in another case declared portions of the Indian Child Welfare Act unconstitutional because it supported racial preferences, according to a report by The Texas Lawbook.
O’Connor also is presiding over a case in which a former Boeing pilot is indicted on charges related to certification of the 737 Max.
The UDF case is set for a jury trial on Dec. 6 in Fort Worth, although legal observers say that date is likely to be pushed back. Pretrial motions in the case are due Monday, and a pretrial conference is scheduled for Dec. 2. Defense lawyers have been ordered to be ready to inform the judge of the status of any plea negotiations at the conference.
A 10-count indictment handed down Oct. 15 states 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 ran an illegal scheme to obtain money and property “by means of materially false and fraudulent pretenses.”https://d93de0786b0bbfec552b57e6843df232.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.html
Preceding the criminal indictments, the SEC sued UDF over similar allegations in 2018. In that civil case, UDF executives agreed to pay $8.2 million to resolve the claims without admitting or denying wrongdoing.
Protective order sought
The government last week requested a protective order preventing the disclosure of a wide range of documents and other materials related to the case by the defendants, their defense counsel, their investigators, assistants and employees.
Lawyers for the defense object to the protective order because it’s too sweeping and prevents those accused of wrongdoing from defending themselves in the courtroom as well as the court of public opinion.
Neal Stephens of law firm Jones Day, who represents Obert, said in a filing last week that the protective order proposed by federal prosecutors does not adequately address privacy concerns of the accused executives, among other concerns.
“The Government is going to extraordinary lengths to try to prevent the issues in this case from being litigated publicly and on the substantive merits, while Kyle Bass tweets out information to intimidate witnesses from testifying for the UDF Executives,” a declaration filed by Stephens on Nov. 3 states.
The allegations against UDF first surfaced in 2015, when Bass accused UDF of operating a Ponzi-like scheme, which led to multiple civil lawsuits being filed, the $8.2 million settlement with the SEC and now the federal criminal charges.
Bass, a hedge fund manager who has been a short-seller of UDF, has for years relentlessly criticized the real estate investment trust on a Dallas-based Hayman Capital Management-sponsored website called “UDFExposed” and elsewhere. Bass has reportedly made tens of millions of dollars short-selling UDF stock. Short-selling, an investment tactic used by many hedge funds, involves betting on a company’s stock to go down.
Bass’ “Ponzi-like scheme” allegation — referring to a form of fraud that entices investors by promising them exceptional returns and pays profits to earlier investors with money from more recent ones — amount to fighting words to UDF’s executives, who deny the allegations.
The UDF executives’ lawyers argue in court filings that the protective order proposed by the government will obscure the truth from the public and fuel what they see as a coordinated effort to discredit UDF and its management.
“The Government’s intense desire to litigate this matter in the shadows, without good cause, only underscores the need for transparency and openness so the public can bear witness to what has really happened here,” Stephens’ opposition to the proposed protective order states. “If there was ever a case that needed a ‘bright light,’ it is this case.”
Paul Pelletier, who represents Greenlaw, said he views the indictments and upcoming trial as an opportunity to clear his client’s name and UDF’s reputation from what he calls a long-running “predatory short and distort attack.”
“While no one wishes to be wrongly indicted, Mr. Greenlaw is grateful that he can now demonstrate the baselessness and vexatiousness of these charges and the egregiousness of the government’s misconduct in a public forum – something we have been trying to do for many years now,” Pelletier said in a statement.
On the other hand, Bass said on Twitter that he was “elated” by the indictment and put the dollar figure he claims UDF owes investors in the $800 million range.
Bass tweeted: “Now the question is … where did investors’ money go?! How much is missing? They owe 20,000 investors over $300,000,000 in missed distributions and over $500,000,000 in principal.”
Expert witnesses on tap
In one of the filings, defense attorneys argue that evidence collected in a February 2016 raid by the FBI on UDF offices should not be allowed at trial because a search warrant used to justify the raid was overly broad.
Defense lawyers in the case also filed documents last week detailing whom they intend to call as expert witnesses in the trial.
One of those is Jeff Ferguson, a partner in the Dallas office of Ernst & Young’s Forensic & Integrity Services practice, according to a biography included in the court filings. Ferguson is “experienced in fraud and forensic investigations involving Ponzi schemes, earnings management matters and manipulation of financial results,” his bio in the court file states.
“Mr. Ferguson may testify regarding the indicia and elements of relevant schemes to defraud, including of Ponzi and market manipulation schemes, and the application of such factors to the facts of this case in assessing whether a company’s operations constitute a Ponzi scheme or other fraud,” according to the defense’s expert witness list.
The witness list says that Ferguson may also testify regarding his review and the content of loan agreements and related loan documents between UDF and other entities.
In prior filings, federal prosecutors identified more than 10 potential expert witnesses, including various real estate development witnesses.