Government prosecutors attempting to send four executives of a North Texas-based real estate investment trust to prison called witnesses Thursday to build their case that transfers between the REIT’s funds are illegal.
Brian Downey, a certified public accountant and auditor with Eisner Amper of New Jersey, testified that he raised questions about various transfers but couldn’t get satisfactory answers from executives of Grapevine-based United Development Funding.
Prosecutors in the Northern District of Texas have charged UDF co-founder and CEO Hollis Greenlaw and three of his colleagues at the REIT with conspiring to illegally shuffle investment dollars in three of its different funds to deceive banks and investors and enrich themselves.
Much of the testimony on Thursday, the second day of trial in federal court in Fort Worth, revolved around fund transfers between entities with common ownership. Downey said those transfers are known as affiliate transactions or related-party transactions, and in most cases, they’re not permitted.
Downey said he raised concerns with Greenlaw, UDF CFO Cara Delin Obert, committee member Benjamin Wissink and other UDF executives that related-party transactions were occurring. Downey never received the necessary documentation he sought to rule out that possibility, he testified.
“I had a number of questions and a number of concerns that these were related-party transactions,” Downey said.
On cross-examination, Downey said it’s possible that Obert did give him a memo on related-party transactions. “The audit started in June 2016 and it’s January 2022, so I don’t remember every specific thing,” he said. Downey also said many variables factor into whether something is a related-party transaction, so it’s not clear-cut.
Wissink and Obert are on trial with Greenlaw and Jeffrey Brandon Jester, UDF director of asset management. They are charged with scheming to defraud the investing public and shareholders.
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 company 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 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 an indictment. 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.
UDF V was created in early 2015, and millions from it were also used to pay off UDF III investors, prosecutors allege.