A “snag” in North Texas-based residential lender United Development Funding’s business model caused the firm to careen off the path of profitability, and the company’s executives then launched an illegal scheme to try to recover and to enrich themselves, a federal prosecutor told jurors Wednesday in opening statements of a white-collar trial in Fort Worth.
Lawyers for the executives of Grapevine-based UDF countered that the charges they face are baseless and that the government is finding problems where none exist.
Hollis Greenlaw, co-founder, CEO and chairman of UDF’s board of trustees, along with three other controlling executives of the real estate investment trust, are on trial in federal court in Fort Worth. They 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.
UDF has a series of funds that raise capital from investors and low-interest bank loans, then lends that capital to land developers and homebuilders at interest rates that exceed the UDF funds’ cost of capital, Tiffany Eggers, the assistant U.S. attorney leading the prosecution, told jurors in an opening statement.
“There was a snag,” Eggers said. “The snag was this: The developers were not paying back their loans quickly enough.”
To hide that fact from investors, the UDF executives conspired to illegally commingle investment dollars in three of its different funds, Eggers said.
When its third fund had shortfalls, UDF launched a fourth fund, and $79 million from UDF IV went to pay investors in UDF III, Eggers said. Then UDF launched a fifth fund and millions more from UDF V went to cover previous funds’ shortfalls, she said.
Lawyers for the UDF executives said the prosecution’s story simply isn’t true.
“The government has got this wrong,” said Paul Pelletier, defense attorney for Greenlaw. “The story they told you is not true. It’s built on sand.”
Prosecutors made up the story because “they don’t use understand this business,” Pelletier said.
Residential developments take time and money to get entitlements, to put in roads and infrastructure and to create home lots before developers start making money instead of spending it, and that’s all factored into UDF’s plan Pelletier said.
“The developments are built one phase at a time, and that takes a lot of money,” he said.
A 10-count indictment made public Oct. 15 claims that from 2011 through 2015, Greenlaw along with 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 investors and shareholders.
The scheme to defraud the public and others through various fund entities started in early 2011 and ran through the end of 2015, prosecutors allege.
Guy Lewis, the defense attorney representing Wissink, said his client and the other UDF executives cooperated fully in a six-year government investigation that led to the charges.
“The evidence will show that this case is about telling the truth, and UDF told the truth,” Lewis said. “They didn’t hide anything.”
He countered the prosecution’s contention that UDF was on the brink of insolvency, leading to desperate and illegal acts by the company’s executives.
“Illiquidity is not insolvency,” Lewis said. “UDF was not broke.”
“When the government says UDF IV or UDF III was broke, the evidence does not support that … If I have (only) $5 in my pocket, but I own my house and my brother is going to pay me back money he borrowed on Monday, I’m not broke.”
The opening statements came after the selection of 14 jurors, which includes two alternates. The jury is comprised of seven men and seven women.
As opening statements approached, the gallery in the Eldon B. Mahon U.S. Courthouse in Fort Worth filled with roughly 80 trial observers.
Judge Reed O’Connor told jurors to expect the trial to last about a week, but to expect the days to be long. The goal is to wrap up the trial sooner, he said.
“I try very hard to get through this without taking many breaks,” O’Connor said. “I will work very hard to minimize the disruption to your lives.”
The trial continues today with testimony from developers who borrowed from UDF and FBI agents who executed a search warrant on UDF’s office in Grapevine.
Click here for the DBJ’s preview of the trial.