An FBI team leaves with bolt cutters during a 2016 raid on the Grapevine headquarters of United Development Funding
Prosecutors in the Northern District of Texas have charged United Development Funding CEO Hollis Greenlaw and three of his UDF colleagues with conspiring to illegally comingle investment dollars in three of its different funds in an effort to deceive its financial bankers and backers.
Lawyers for the UDF executives say the charges are without merit. The defendants have pleaded not guilty on their initial appearance in federal court in Fort Worth.
In a statement Paul Pelletier, who represents Greenlaw, blamed the sustained investigation on a coordinated effort to discredit UDF.
“For the past 6 ½ years UDF has endured an illegal predatory short and distort attack, an unlawful FBI search and a transitory government investigation with ever-changing theories of alleged liability,” Pelletier said.
“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.”
More than two-dozen white-collar criminal defense attorneys and securities enforcement lawyers have been involved in the dispute since 2015 and as many as another dozen lawyers have been contacted by those who continue to be the target of the federal inquiry or potential witnesses in the case.
The allegations against UDF first surfaced in 2015, when Kyle Bass of Hayman Capital Management publicly accused UDF of operating a Ponzi-like scheme, which led to multiple civil lawsuits being filed, an investigation by the U.S. Securities and Exchange Commission, an $8.2 million settlement with the SEC in 2018, and now federal criminal charges.
Bass’s public comments also led to a civil dispute that exploded into a Dallas County courtroom in November 2017 between UDF and Hayman. That case is expected to head to trial next May.
Dallas lawyer Jeff Tillotson, who represents Bass and Hayman in the litigation, said he found UDF’s eagerness to challenge the criminal charges ironic because the executives have “walked away from” the “last 10 fights.”
“The SEC sued them for many of these same allegations and they didn’t fight it … they settled the same day for $8.2 million,” Tillotson said. “[They didn’t fight] all the shareholder suits alleging the same things. They settled [most] of those cases — as a footnote — with investor money.”
In April 2020, UDF lawyers went on the offensive by suing then-assistant U.S. Attorney Nick Bunch and a handful of FBI agents in a Bivens action, claiming that they conspired with Bass to violate the rights of the UDF executives. The case, currently under seal, is pending in the Eastern District of Texas where Judge Sean Jordan is considering the DOJ’s motion to dismiss.
In his statement, Pelletier says that unusual lawsuit became part of UDF’s negotiations with the government.
“The government then offered to enter into an agreement not to prosecute UDF or UDF’s executives if UDF and its executives would agree to dismiss the Bivens action. UDF and its executives, as prudent fiduciaries, declined to do so, believing such an arrangement would not be in accordance with the law and relevant ethical considerations,” Pelletier said.
Haynes and Boone announced on Monday that Bunch is joining the firm’s white collar practice.
The Prosecutors & the Charges
Leading the prosecution now is assistant U.S. Attorney Tiffany Eggers, who spent 13 years prosecuting money laundering and fraud cases in Florida before she was hired in 2018 by then-U.S. Attorney Erin Nealy Cox to lead criminal prosecutions in the Northern District of Texas. Eggers played a leading role in the recent public corruption prosecution of Dallas developer Ruel Hamilton, who was accused of paying thousands of dollars to two former city council members. The DOJ this year named Eggers the Northern District prosecutor of the year.
Eggers is joined by three other assistant U.S. attorneys – Elyse Lyons, Errin Martin and Leslie Jones.
Errin Martin is mentioned by many as one of the candidates in the running to be US attorney for the Northern District.
The 10-count indictment, handed down Oct. 15, states that Greenlaw, UDF partnership president and committee member Benjamin Lee Wissink, UDF CFO Cara Delin Obert and UDF director of asset management Jeffrey Brandon Jester “did knowingly execute and attempt to execute a scheme to defraud the investing public and shareholders” by obtaining “money and property by means of materially false and fraudulent pretenses.”
The indictment states that UDF created what is known as Fund III to originate, acquire and manage a portfolio of mortgage loans or equity interests in a variety of real estate investments. Fund III attracted $350 million in investments, and had originated loans of $636.9 million, according to court documents.
A separate entity called Fund IV was a Maryland-chartered Real Estate Investment Trust created as a loan facility for developers of single-family homes and mixed-used community developments. Traded on the Nasdaq Global Select Market, Fund IV raised $651 million from investors.
But when Fund III borrowers became slow to pay their obligations, UDF executives began using Fund IV funds for Fund III obligations, the indictment says. Between January 2011 and November 2015, more than $65 million in cash raised by Fund IV was used to pay investors in Fund III a return on their money, as well as other corporate expenses, according to the indictment.
Likewise, a Fund V was created in early 2015 as a Maryland-chartered REIT. Although its maximum offering was up to $1 billion, by September 2015 Fund V had attracted only $42.9 million for its investor shares, court records show. By the end of December 2015, about $4.5 million had been used to pay off Fund III investors, according to the indictment.
During the same period, in addition to their public offerings, the UDF entities were also borrowing from a variety of banks with which they were doing business to provide enhanced credit for various real estate deals.
According to the charges against the four executives, instead of using the money for real estate lending, the proceeds of those loans were also used to pay off investors, particularly those who had invested in Fund III. Moreover, investor funds from one fund were used to pay off a term loan secured by UDF that required $1.25 million in quarter payments.
The Defense Team
The defendants have lined up their all-star team of lawyers. Three out of four lead lawyers were big-time Floridian prosecutors at one point or another.
Pelletier, a lawyer in the Washington, D.C. area, served as a prosecutor for more than 26 years in the Southern District of Florida’s U.S. Attorney Office. For five years, he was the chief of the economic crimes unit. He was also chief and principal deputy chief of the criminal division’s fraud section for almost nine years.
Jester’s lead lawyer is Jeff Ansley, a partner at Bell, Nunnally & Martin who is a former federal prosecutor for the Northern District of Texas and also served as an enforcement attorney for the SEC. Ansley did immediately return a message seeking comment.
The Jester team also includes Bell Nunnally associates Arianna Goodman and Katherine Devlin. In late 2019, Ansley and Goodman successfully obtained an acquittal for North Texas pharmacist Steven Kuper following a two-month trial in which federal prosecutors alleged Kuper and other defendants conspired to defraud Tricare, the U.S. military healthcare system, in a $100 million kickback scheme.
Neal Stephens of Jones Day in Palo Alto leads Cara Obert’s legal team, which also includes Dallas associate Madeline Smart.
Stephens previously worked as a federal prosecutor in Miami and served as chief of the Narcotics Section and regional coordinator of the Organized Crime Drug Enforcement Task Force. He spent his time as an AUSA extraditing high-level Colombian narcotics traffickers and money launderers, including members of the Medellin Cartel from the Escobar and Ochoa families, as well as Alberto Orlandez Gamboa from the North Valle Cartel. Since he shifted his practice to the defense side, Stephens has represented former McAfee General Counsel Kent Roberts and former Sonoma Valley Bank CEO Sean Cutting, among others.
Wissink retained Guy Lewis, another lawyer with ties to Florida. Lewis declined to comment on the charges brought against Wissink.
Now based in the Miami suburb of Pinecrest, Lewis served as the U.S. Attorney for the Southern District of Florida from 2000 to 2002, and before that spent more than a decade prosecuting public corruption, espionage, civil rights, endangered species, money laundering and narcotics cases, including United States v. General Manuel Noriega, for which he received the Attorney General Award. He also served as chief of the Narcotics Section and SDFL’s First Assistant U.S. Attorney. After his tenure as U.S. Attorney, Lewis worked in Main Justice in Washington, D.C. as the director for the Executive Office for United States Attorneys.
UDF-Hayman Lawsuit
In the underlying UDF-Hayman-Bass civil litigation, UDF alleges Hayman and Bass mounted an illegal campaign to spread false information about UDF and its affiliates in an effort to reap huge financial gains. The lawsuit also claims that former Hayman Capital General Counsel Christopher Kirkpatrick, who was an enforcement lawyer with the SEC’s Fort Worth regional office in the 1990s, supplied false information about UDF to his former SEC colleagues and the FBI in an effort to get the agencies to open investigations.
Bass and Hayman are in the business of short-selling, an investment tactic employed by many hedge funds that bet on a company stock declining. Most notably, he is known for his bet against subprime mortgages that were at the center of the 2008 financial crisis.
Bass and Hayman made tens of millions from shorting stock in UDF Fund IV. Last summer, it was reported that the SEC began investigating Hayman over whether it engaged in market manipulation through Bass’s relentless criticism of UDF.
Hayman and Bass had argued that UDF’s lawsuit should be dismissed because their posts about UDF, published on a site called udfexposed.com, were protected by the First Amendment, but a trial court declined to dismiss the lawsuit on that argument, and the Dallas Court of Appeals agreed in 2018.
Since then, it’s been a revolving door of counsel changes on both sides. Tillotson currently leads the case for Hayman and Bass, while Leon Carter of Carter Arnett currently leads the case for UDF.
Tillotson said more will come out in their case because “the operations at UDF are far worse than what’s alleged in the indictment.
Discovery is currently underway in the case, and depositions are starting to be scheduled. Of note, Tillotson said, will be Greenlaw’s upcoming testimony.
“[Greenlaw’s] lawyer says he can’t wait to prove the egregiousness of government misconduct; we’re going to get him before the U.S. government gets him,” Tillotson said. “UDF has been trying for the past six years to blame all of their problems on Kyle Bass, and it’s simply not true.
“It’s time for Mr. Pelletier and Mr. Greenlaw to stop blaming Kyle Bass for the outrageous way they ran this company. Time’s up.”
Allen Pusey contributed to this report.