The U.S. Securities and Exchange Commission officially filed charges Tuesday against two prominent Grapevine-based real estate investment trusts and five of its senior executives for misleading investors about the financial health of one of its key funds.
Lawyers for the SEC’s Fort Worth Regional Office filed a 22-page complaint in federal court in Dallas Tuesday accusing United Development Funding, which manages a series of privately held and publicly-traded REIT funds, with failing to disclose that it was using investment money from one of its newer funds to pay distributions of older trusts.
The SEC also claims that four UDF senior officials – chief executive officer Hollis Greenlaw, executive vice president Benjamin Wissink, chairman and partner Theodore Etter, and chief financial officer Cara Obert – “knew or should have known” that the trusts they were operating misled investors about the use of funds.
The SEC also charges UDF chief accounting officer David Hanson with “signing false and misleading SEC filings and management representation letters without taking sufficient actions to ensure the accuracy of or a sufficient basis for many of their representations.”
Federal court documents also show that UDF and the SEC have negotiated a settlement of the charges, which officially ends the SEC’s multi-year investigation into the fund. The SEC’s settlement with UDF, however, does not impact the FBI’s ongoing probe of the company.
Under the agreement with the SEC, the five UDF officials have agreed to pay federal regulators a combined $8.2 million in civil penalties, disgorgement of profits and prejudgment interest. UDF, as a company, is spared any fines.
“UDF solicited investments by allegedly touting consistent investment returns,” said SEC Fort Worth Regional Director Shamoil Shipchandler. “But instead, as we allege, the family of funds and its executives concealed the economic reality of UDF’s business operations and masked the fact that payments to investors in an earlier fund came from a newer fund.”
UDF CEO Greenlaw, in a statement issued Tuesday afternoon, said the settlement resolves all investigations by the SEC and that neither the company nor the executives admit or deny the SEC’s allegations.
“We believe that it was time to put this matter behind us and that this settlement is in the best interests of UDF and its investors,” Greenlaw said.
Barrett Howell, a partner at Katten Muchin in Dallas and one of UDF’s lead outside lawyers, said company leaders and SEC officials “negotiated a settlement of a hotly disputed, over five-year investigation.
“Although we cannot comment on the allegations made in the complaint, the company ultimately agreed to settle on allegations of negligence to avoid the distraction and expense of protracted litigation against the SEC,” Howell said.
The investigations by the SEC and FBI into UDF officials has provided significant legal work for several prominent white-collar criminal defense attorneys in North Texas. For example, Mike Gibson is representing Greenlaw, Matthew Nielson is advising Wissink, Mike Uhl is representing Etter, Wes Loegering and Joan McKown are defending Obert and Arnold Spencer is advising Hanson.
UDF is also involved in a high-stakes civil lawsuit with hedge fund manager Kyle Bass.